Planning for the Upturn

When faced with a downturn in the economy, the obvious reaction is to cut costs and typically that involes a lot of firing. However, in studying the successes and failures of hundreds of companies as they navigate downturns, numerous reports suggest that this approach is a short term savings that doesn't justify the larger and long-term negative impact of cutting the employee numbers.

Most executives understand the potential damage of massive cuts to employee numbers and see the negative impact of the firm’s reputation and the goodwill of their employees. However, the oft used method to cut the wage bill is with lay-offs.

In a recent survey of HR directors conducted by Hewitt, 81 per cent of companies said they plan to further cut costs this year even though they have already made significant reductions. Furthermore, 28 per cent say they are planning to do so by “restructuring” and 25 per cent are considering lay-offs.

Meanwhile, a recent Towers Perrin study of 600 HR executives found that while cost pressures remain intense, cutting too deeply into an organisation’s muscle – its talent – could seriously hamstring a fast return to growth.

As economists and reports have stated, we have entered this downturn very quickly and may come out of it equally as quickly. The Hewitt study showed that 54 per cent of HR directors believe the US’s economic upturn will begin at the end of this year or in early 2010 and most believe their own company’s economic improvement will coincide with that upturn.

So it seems that the logical solution for companies under economic pressure is not to buckle under the pressure in the search for a quick fix, but rather be creative and innovative in looking for other cost-cutting strategies that will keep the company not only alive, but strong for the upturn.

There are many other options companies can take that will either cut costs, or counter the need to cut costs by increasing productivity and performance.

Below are five cost-cutting strategies proffered by various HR directors, academics and survey findings, which will help companies avoid the dreaded lay-offs.

Strategy 1

Purchasable annual leave

PricewaterhouseCoopers (PWC) have had their “equilibrium” program in place for the past four years. It was introduced as a flexible work arrangement whereby indi viduals could elect to work in a range of flexible ways. But, as the company felt the pressure of the downturn, they opted to offer additional purchasable annual leave for an extended period of seven months, until the end of January 2010.

The offer was made to 4500 employees and was communicated in a transparent way, so that each employee knew the reason for the offer – to avoid having to lay people off.

The results of the offer were significant. Ninety per cent of the 4500 employees accepted the offer to take between 10 and 15 days unpaid leave.

“It was an amazing response,” says HR director of PWC, Nicole Brazil. “It really said a lot to us about the fabric of our organisation and that people know we are all in this together.”

Exactly how much money the strategy saved the company – and in turn how many jobs it saved – is difficult to quantify, however, with more than 4000 employees taking an extra 10 to 15 days unpaid leave it’s easy to say it would have a huge impact on overall savings. This measure will be far more beneficial to the company than letting people go in preparation for when the economic pressure eases.

Strategy 2

Job sharing

At the outset it might not seem like a cost-cutting strategy, but, job sharing can actually work as a means of saving cash.

If two people are doing the one job, in one sense there are the same costs involved because a company still has to pay the same salary for a particular role to be performed. However, the savings in benefits normally paid to a full-time employee are significant, so in that sense there is a cost saving to be had.

Job sharing also leads to reduced absenteeism and increased productivity. Having two people doing the one job means they work out a schedule to do certain hours and they therefore have more time off work and tend to turn up for those scheduled hours, leading to decreased absenteeism.

Job sharing also tends to motivate people. Loyalty is up, productivity is up, but where the customer is concerned it can be less predictable. However, overall the advantages over-ride the disadvantages.

Strategy 3

Pay cuts and reduced hours

A recent Employee Insights Survey of 560 professionals showed that nationally, 70 per cent would prefer to stay at their current employer and work reduced hours than face alternative cost-cutting strategies.

One of the most successful strategies globally has been to cut both pay and hours. But the key to success when taking this strategy is to cut it across the board – by including every person in the organisation. The management must tell the employees what the situation is and explain the environment they are working in. They must explain that everybody is going to cut back in order to save jobs.

If pay cuts are not across all levels of the organisation, he says, it creates a level of cynicism and consternation among employees. People want to see that the situation is affect ing everybody – including senior executives – and that those strategies are a genuine and sincere attempt to save the company.

People need to buy in. If you have employees buying in and they see what you’re doing and why you’re doing it and it has a good level and degree of fairness, then people will work with you.

Strategy 4

Work with employees – not against them

In a lot of cases, cost-cutting measures are driven from the top down,. but sometimes it's better to go to employees themselves and ask them how they think they could save money or increase productivity.

The staff know their own jobs themselves and each of them knows where there is corporate slack, so if you can work on a system and involve the employees on eliminating slack – eliminating non-value-adding components of their work – it produces a lot of buy-in and goodwill.

The differentiator between companies in times like this is getting out there and growing the business and seeking opportunities to expand and grow when every one else is hunkering down.

A suprising statistic suggests that increasing performance by 1 per cent has a much greater impact than reducing employee costs by 10 per cent, so moving the focus to increasing performance under economic pressure is a better cost saving method.

The other big way in which HR can make a difference is through talent management.

HR can really make a difference by identifying who your best players are, who will bring you through this period and how you can help these employees, coach them, and position yourselves to ensure you keep them and mitigate the risks of them leaving.

Because of the speed with which we entered this down turn, and the possibility that we may exit from it just as rapidly, if a company doesn’t have the right people in place to respond when the upturn comes, it will be in danger. Therefore, there are a lot of dangers involved in cutting costs too much. If you’re just cutting costs and cutting costs … when the upturn comes you don’t have the people or the structure in place to respond.

Everybody turns to cost cuts as a good way to go, or taking out numbers as a good way to go – but it’s got a huge cost in terms of brand damage and reputation and that’s one of the hardest thing to get back.

Strategy 5

Avoid layoffs and utilize alternative measures first as a means to cut costs.

Lay-offs must be the very last resort. It has such a huge impact on the culture of a company and people don't forget.

It impacts staff motivation and although productivity may not be impacted short-term, in the long-term loyalty gets affected, work satisfaction gets affected, innovation gets very much affected.

You have all these negative aspects which sometimes are very difficult to quantify. You spend years and decades building a corporate culture and then a bump occurs in the economic cycle and managers jump straight to employee lay-offs.

While lay-off are not always wrong, companies must look for a solution that is creative, that will work in the short, medium and long-term and keep in mind that the economic downturn is only temporary and will pick up again.


[Source: Human Resource Leader, 25 June 2009]