The Downturn is Coming, But When?
Many HR individuals I’ve met do not even like to discuss the topic of economic downturns. I presume this avoidance is based on the premise that even “talking” about them somehow will make them happen.
Unfortunately, the consequences of not discussing or preparing for downturns might mean that the disruption to the company will be that much worse. An economic downturn or recession will occur. The only question that remains to be answered is when.
This inevitability means that there are few downsides to developing a downturn plan, even if it ends up sitting on the shelf for a while. Just like death and taxes, it’s always a wise idea to have a plan in place so that HR can minimize negative impacts, not to mention come across as effective, forward-looking, and strategic.
The Three Essential Components of Any Downturn Plan
Any great workforce “downturn” plan has three essential components. The key measures you should plan include preparing a forecast, preparing action steps, and convincing managers with solid data.
Prepare a Forecast
There are several things that HR can do to develop a forecast that adequately warns managers about an upcoming downturn, including:
- Benchmarking. Identify firms that are the first to be impacted by a downturn. Look for hiring slowdowns, hiring freezes, pay freezes, and layoffs at other firms that, in the past, have been impacted by an economic downturn long before your firm has had to act.
- Looking for internal indicators. Look at internal indicators like sales forecasts, budgets, revenues, production forecasts, and strategic business plans for indications that your own executives are preparing for a slowdown.
- Looking at people management indicators. Look for internal projected reductions in headcount and hiring but also examine “headcount fat.” Headcount fat is simply when you have a surplus of employees based on your firm’s revenue per employee ratio target. Simply put, if historically your revenue per employee has averaged $100,000 and your CFO’s forecast of next year’s revenue will be $1 million, then having 10 employees will put you on target, while having 11 employees will mean that you will have one surplus employee (indicating headcount fat). The exception to this rule is organizations undertaking significant development efforts that affect the current employee count, but produce no immediate revenue.
- Looking for economic precursors. Do your research to see whether, in the past, there are economic precursors or predictors that indicate an upcoming downturn for your firm or industry. These economic precursors or warning signs might be changes in interest rates, unemployment rates, currency fluctuations, disposable income, and tax rates.
Prepare Action Steps
The second component of planning for a downturn requires you to prepare action steps or plans to handle each of the major workforce problems that you have forecasted. Some of the HR action steps might include:
- Conducting a “mock” layoff. Many in HR literally squawk when I suggest this action. I guess the pain associated with past layoffs have left a negative imprint on their brain, but once again, preparing for something doesn’t “cause” it to actually happen. In a mock layoff, you go through the organizational chart with individual managers and you jointly identify which positions would most likely be reduced if you were to have a layoff of 1%, 5%, or 10%. If you like, identify the specific employees in those jobs who are most likely to be laid off, should layoffs occur. Those individuals can be put on a contract basis, put on performance management, or if you’re bold, warned individually that their job is at risk. This could minimize any surprises.
- Increasing your contingency workforce. Because contingency workers can be more easily released, putting a percentage of your new hires (or even current employees) on a contract basis will give you more flexibility in the case of a downturn. The contingency workforce percentage should at least equal the most-likely layoff percentage. The targeted employees and jobs should obviously be primarily in the job families and business units identified during your “mock” layoff.
- Releasing bottom performers. If your organization routinely lacks the courage to release (fire) bottom performers, that attitude should change when an economic downturn occurs. Action steps might include increasing the number of individuals on performance management or outright releasing poor performers at the beginning of any downturn. Another option is to “swap” employees, which means that you actively look for replacements for these poor performers and only when you have clearly found a superior candidate do you actually replace them.
- Trying “if, then” scenarios. By far, the best way to prepare managers for potential problems is to force them to participate in “if, then” or “what if?” scenarios. Key managers would be asked to prepare “if, then” plans designed to handle each of the people management problems that would most likely occur as a result of the downturn. Ideally, the managers would also be required to present and defend their plans to an assessment team.
- Assessing headcount fat. In addition to forecasting potential headcount fat, there needs to be an action plan to continually identify the specific jobs and business units where there is a surplus of employees, once a downturn begins.
- Planning for labor arbitrage. Because labor costs become a major issue during a downturn, HR needs to develop action plans that allow the firm to “shift” work rapidly to areas where the labor costs are lower. This focus on getting the lowest-cost labor, while maintaining quality, might mean geographically shifting the work, outsourcing the work, or replacing work done by people with machines and technology.
- Developing retention plans. If your forecast indicates that the downturn will affect your company alone, include action steps to handle the likely increase in turnover among your top performers as they invariably migrate to other “non-struggling” companies. On the other hand, if you forecast a broad downturn, you can relax your retention efforts because fewer individuals leave a secure job during a broad economic downturn.
- Developing productivity improvement plans. Because increased productivity and a higher return on investment are always key issues during tough economic times, an obvious area for an action plan is for HR to develop action steps for increasing employee productivity. This plan might include changing incentives, increasing non-monetary motivators, improving training, or even redeploying key workers to areas within the firm where they can have a larger business impact.
- Making fast recovery plans. Because all downturns eventually end, the very best firms accurately forecast the end of the downturn. In addition, HR develops talent-management plans that allow the organization to rapidly “scale-up” and recover, just as the downturn is ending.
Convince Managers with Solid Data
The third and final component of preparing an economic downturn plan is developing a process that provides data, arguments, and information to managers that are so compelling and convincing, they follow your prescribed action plans precisely when you ask. Some of the action steps that I recommend for convincing managers include:
- Showing the correlation. Look at historical events and calculate the connection or correlation between business success and following the prescribed downturn plan. If managers clearly see that their business performance bonus will be negatively impacted if they mishandle downturn related people management problems, they are more likely to follow your lead.
- Converting people management impacts into dollars. Quite often, telling managers about talent management problems using “words” alone (like higher turnover, lower morale, or decreased engagement scores) has little impact on their behavior. Managers live in a world where everything is quantified in dollars and cents. As a result, it’s important that you work with the CFO’s office to convert all “people management impacts” into the actual dollar impact that they have on sales, revenue, and profit.
- Integrating metrics into standard reports. Distributing workforce plans or reports independently almost guarantees that they will be ignored. If you want managers to pay attention, you need to integrate your key workforce planning metrics and recommendations into standard business and financial reports, so that they see your workforce planning information at the same time and right alongside other important business information.
- Getting a champion. Work closely with a few influential managers to ensure that your downturn plan meets their needs. In addition, encourage them to be “champions” of your plan and to spread the word among their colleagues about its relevance and impact.
Competency studies have demonstrated that a comprehensive knowledge of business is more critical to HR success than a knowledge of HR practices. For example, to be successful in HR, you need to be well-read in economics and business trends. But it’s not enough just to react to these trends as they occur.
Instead, you need to have the capability of looking forward and accurately forecasting upcoming downturns. You then need to prepare action plans that are so effective that managers follow them to the letter.
There is, however, one additional requirement if you are to be successful in preparing your organization for these inevitable economic downturns. You need courage to take on the “Pollyanna’s” in HR and to talk openly about the need to actively plan for the upcoming layoffs, hiring freezes, and budget cuts. The time to act is now.