Sales are declining and so are profits.
Many CEOs react to economic downturns by cutting costs and eliminating
staff, because human capital costs are
often a company’s largest operating expenditure. While reductions in the company’s
top line are temporary, the long-term forecasted changes in work force demographics are not. Baby boomers may delay their
retirement by a few years, due to shrinking
portfolio values, but soon they will be exiting the work force, followed shortly thereafter by all the other boomers who are right
behind them. Unless staff reductions are
made wisely, the resulting business impact
may be felt long after the economy
rebounds.
“Despite the economic conditions, there
are still talent shortages in critical skill
areas,” says Paul DeYoung, talent management practice leader for Watson Wyatt
Worldwide. “If executives simply issue an
edict to management to reduce personnel
expenditures by a certain percentage, the
long-term results can be devastating.
Strategic work force planning is a vital
component of any downsizing action.”
Smart Business asked DeYoung what
executives should consider when designing and executing a human capital cost
reduction strategy.
What should CEOs evaluate before making
staff reductions?
Executives need to understand which
employees are pivotal players by asking
who will bring the greatest value to the
company in both the short term and long
term. What executives want to avoid is
making staff reductions purely a financial
exercise, left strictly to the discretion of
line managers, who may not understand
the long-term impact of releasing critical
staff. Conduct a work force supply-and-demand analysis looking forward five
years; inventory those who have critical
skills and who are your top performers and
make sure that they are taken care of,
because downsizings create uncertainty,
and CEOs should not assume that retained
employees will be grateful to have their
jobs and will stay once the economy
rebounds.
How can CEOs reduce costs while avoiding
long-term business impacts?
Don’t focus on cutting heads; focus on
reducing total expenses. For example,
eliminating contractors or temps might be
a good way to reduce short-term costs, but
their charges usually aren’t included in the
same line item as full-time staff expenses.
A strategy focused on reducing head count
may miss this opportunity to save these
costs while preserving key personnel.
Perhaps some employees would be willing
to work part time or take unpaid leave as a
way to reduce expenses; both moves preserve institutional knowledge and long-term productivity. Reductions in overtime
or hiring freezes can produce savings without eliminating vital employees.
Are there other ways to save on human capital expenses?
Downturns can be an opportune time to
look at organizational structures or job
design to achieve greater efficiencies and
savings. Do you have managers reporting
to managers? Are engineers spending 60
percent of their time on administrative
tasks? While the analysis and realignment
process doesn’t produce instant cost savings, the company will benefit in the long
term from making changes that improve
efficiencies and the return for every dollar
spent on human capital.
What are the best practices for implementing
human capital reductions?
When it comes to sensitive areas like
eliminating staff, how the process is conducted and communicating with employees is vital, because employee morale and
productivity hang in the balance.
- Put safeguards in place to make certain
that any head count reductions are sustained. You don’t want managers bringing
back former employees as contractors, for
instance, unless it’s part of the strategic
plan. - Take steps to retain critical knowledge.
Offer employees outplacement services
and severance pay in exchange for training, if the company doesn’t have formal
training and mentoring programs that facilitate knowledge transfer. - Restructure performance plans. It’s
important to re-establish priorities and
align employee performance objectives to
fit with the company’s revised structure
and head count. - Communicate effectively and transparently. Reach out and communicate with
employees whenever possible, so they are
reassured. If the company’s priorities have
changed, communicate the new vision. To
drive engagement and productivity you
have to create line-of-sight between the
company’s mission and the role of employees at every level of the organization. When
layoffs occur, employees will have questions, and it’s critical for CEOs to address
them. - Manage the process well. There are
many hidden costs to conducting this
poorly. - Do not forget about taking care of the
survivors.
PAUL DEYOUNG is a talent management practice leader for Watson Wyatt Worldwide. Reach him at [email protected]
or (818) 623-4779.
