Shock value

Economic fluctuations pose challenges for every business.

But when the economy teeters on the edge of recession, the challenges demand action. Often, business leaders face weighing the fluctuating economy against the ability to provide good customer service.

While economists say layoffs decrease the flow of resources and serve to escalate recession, many human resource managers say layoffs are imperative. But others believe in creative alternatives to avoid losing valuable, well-trained employees.

So as some business leaders choose to ride the wave of economic instability, others look at dropping sales and begin to trim jobs. There is no one answer, only one definite fact — this has been the year for taking a gamble and following your instincts.

Short term vs. long term

When the bottom fell out of the stock market last year, most organizations began formulating short-term and long-term plans. But no one could foresee the recent catastrophic events that sent the service industry into an immediate slump.

Paul Gerhart says working on the human resources side of business today is a daunting task. Gerhart is professor of Industrial Relations and head of the Labor and Human Resources Policy Division at the Weatherhead School of Management at Case Western Reserve University.

He says that to understand the effects of any decision, you must look at different sides of every option. For example, many organizations are opting to rework employees’ schedules to lessen costs. However, while shortening your employees’ work weeks may seem like a smart way to avoid a general layoff, it may not be the best solution from the human resources aspect.

”Employees want to have some economic security in the job — how am I going to pay my rent, my auto payment and buy groceries for the kids,” explains Gerhart. ”The reality is, the same questions start to get asked when you start cutting people’s hours.”

Employers may see an immediate reduction in overhead when they shorten hours; however, it does not pack the wallop of a layoff because there is no proportionate decrease in employee benefits. Benefit packages can account for up to 25 percent of the cost of an employee to an organization.

Gerhart says that a shorter work week has an immediate effect on spending patterns because people are forced to tighten their belts.

”I don’t know about your household, but if my pay went down by 20 percent, my wife would notice it,” he says.

Besides, not every company has the team orientation and camaraderie amongst the employees to withstand spreading out the pain to avoid losing anyone. Warns Gerhart, ”It will not work in every organization.”

Daniel Serbin, vice president of human resources at Parker Hannifin Corp. in Cleveland, says it’s a matter of balancing the volume of work with the economic environment and your company’s pressure to deliver product.

Cutting the work week may mean losing good employees to industries still thriving, says Serbin.

”I think you really have to look at the economy and the recovery cycle,” he says.

Serbin says employees will not tolerate an extended period of fewer hours and less pay, even if it’s done with the intention of saving jobs. If the sales drop in your industry looks like more than a blip in the economy, the better course of action may be letting newer employees, weaker performers and temporary staff go in order to hang on to the more valuable personnel.

But that jeopardizes a company’s overall capabilities when the economy does comes back, especially if the industry demands a fast turnaround time from order to shipment.

”You always have to balance it,” says Serbin. ”If they’re blips in the economy, we don’t make major work force adjustments.”

Stockpiling people

At the other end of the layoff debate is a concept known as labor hoarding. Labor hoarding is what happens when workers with technical, semi-technical or machine-specific training move into other positions, even an unskilled position, just to keep them on the payroll.

This strategy also keeps layoffs to a minimum and avoids the high cost of training new employees if or when business picks up.

Alan Clardy, professor of Labor Relations at Towson University in Maryland, studies human resource trends globally. He says employers are becoming more aware of the true loss to a company when employees leave.

Maintaining intellectual capital and knowledge management are two areas on the rise. Because of the high cost of education and productivity losses with new hires, many companies are looking at ways to account for the brainpower and skills of employees.

Before losing an employee, Clardy suggests making sure all that person’s knowledge regarding the business is maintained and is accessible.

But Gerhart warns, ”If you’re going to use the labor hoarding approach, that suggests you’re going to continue to pay your employees at least full-time pay, so you have to be confident that things are not going to be down very long.”

And there’s another factor. New, less challenging roles can lead to employees who feel underutilized and start scouring the want ads. So is labor hoarding a reasonable short-term fix?

”Absolutely,” says Gerhart. ”But it takes more analysis. You have to go one or two steps further to find out what the real impact will be.”

Carla Gold is a general manager in one of harder-hit industries — hotel hospitality. Gold manages the Radisson Hotel in Cleveland and says business has been dropping approximately 20 percent a month. Reports abound of hotels cutting staff, but the Radisson is not among them.

Because unemployment was so low in 2000, Gold has been running with a lean staff for a year. And, although sales are down, she is not planning layoffs or shorter work weeks.

”We had a meeting with all our managers. …We’re not going to ask for 20 percent pay cuts,” says Gold. ”We are going to ask you to work 20 percent more.”

Gold’s answer to the downturn is, ”Work harder, and give our customer a satisfying experience.”

Few people are willing to predict where the economy is headed and when it will get there. That means companies will continue to make educated guesses on what to do and when to do it to best benefit the organization. How to reach: Case Western Reserve University, (216) 368-2045; Radisson Hotel, (216) 377-9000; Towson University, (410) 704-3215; Parker Hannifin Corp., (216) 896-3000

Deborah Garofalo ([email protected]) is associate editor of SBN Magazine.