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
- 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
- Manage the process well. There are
many hidden costs to conducting this
- 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@example.com or (818) 623-4779.