"Leading indicators or precursors are events or data points that generally occur shortly before an event materializes.”
There are two types of warning signs for indicating that there is a coming upturn in employment. The first group contains precursors that are internal to the company. These precursors are generally changes in financial and operational ratios within the firm. Once you have examined these internal factors you then shift your efforts in order to look for external leading indicators within the industry and the economy. Leading indicators in each of these two categories are listed below.
Part I – Internal indicators of possible job growth
We all know that business cycles exist so it should be no surprise that HR activities related to boom and bust can be tied to them. Recruiters and managers need to know "when" the cycles will begin and end. The key to accurately predicting this is to track the historical patterns within the firm in order to see if there is any leading indicators or precursors which serve as warning signs about upcoming job growth. Once you identify these leading indicators and patterns, it is relatively easy to predict future job growth within a particular firm. Some of these precursors include:
Profit, sales and revenue indicators (possible job growth precursors)*
Although there are a few efforts to forecast industry growth and shrinkage patterns within HR, there are other functional areas in the business that routinely forecast the future. For example, the managers that supervise sales and manufacturing forecasts, budgets, strategic plans and revenue projections all analyze data and use it to forecast company growth. If HR can gain access to these forecasts it can utilize them as a mechanism for forecasting future job growth. As a result, it is important to monitor these key ratios including the growth in revenue, profit and sales as potential “leading indicators” of the need for future hiring. Some of these key ratios are found in financial reports while others must be sought out in different functional areas. Some of the specific organizational ratios and factors to monitor as leading indicators include:
- Profit-related precursors – Actual or projected profit growth projections increase by >5%. Profit growth is a leading indicator because organizations routinely increase staff to maintain an increase in the rate of profit growth
- Revenue related precursors – Revenue growth increases or projections increase by >10%
- Revenue per employee ratio–When this workforce productivity ratio is near its highest historical level or it is increasing by >10%. This is a key indicator because once all of the possible workforce productivity can be squeezed out of an organization, the next step is to hire additional staff
- Customer orders – Sales/ orders are up by >25% when comparing this year to last year. Although sales forecasts can be problematic, a large increase in sales forecasts routinely triggers the hiring of additional sales, service and production workers
- % of profit from new products– The percentage of your organizations total profit that comes from recently introduced products /services (introduced within the last two years) is increasing to over 50%. Indicating the value of product innovation and the need to fully staff that effort
- Market share – Our competitive market share (actual or projected) increases by >5%. Because increasing market share is so critical to senior management, a significant market share increases frequently triggers new hiring
- More than 50% of the product divisions are profitable. Profitability across many business units is an indication of overall firm health and the signal to end hiring freezes
- For start ups, your capital burn rate indicates that there is sufficient funding for two more years. Having sufficient capital make CFOs comfortable in allowing additional hiring
- Cash flows are steady or increasing, indicating that there are sufficient funds for new hiring
Internal “people costs” indicators – (possible job growth precursors)
- Employee head count growth has been frozen for more than a year, indicating that it may be time to allow additional hiring
- The percentage of “overhead employee” headcount (or budget) is at or near an all-time low. A record low overhead ratio indicates that overhead cuts may have gone too far so that they now may hinder future growth
- The ratio of # of employees to manager is at or near an all-time high. A high ratio of employees to managers may be an indication that spans of control have exceeded safe levels. The next logical step is to increase the number of managers
- The number of internal employee promotions is at or near an all-time low. A long period of no promotions may be an indicator that frustrated employees will begin leaving in large numbers unless promotions increase
- Employee turnover increases by more than 25%. As a rate of employee turnover increases, it can serve as an indicator that employees are frustrated and overworked
- HR spending per employee is below 1% or is at or near an all-time low. A record low level of spending in HR may be an indicator that the lack of HR capability may negatively impact workforce productivity and company growth
- There has been a recent (within the last six months) opening up on salary increases or bonuses. In many organizations, significant salary increases are a precursor to an opening of job requisitions
- There has been a recent (within the last six months) removal of a freeze on requisitions, promotions or hiring. Traditionally, significant new hiring follows the removal of long-standing hiring freezes
- The level of approval required for new requisitions decreases. When senior executives release their demand for approving all requisitions, it frequently indicates an upcoming willingness to expand hiring
- The dollar amount of outsourcing has not increased by more than 5%. When an outsourcing trend slows down significantly or reverses, it is frequently a precursor to more internal job growth
Product, plant and inventory indicators – (possible “job growth" precursors)
- The backlog of unfilled orders increases by more than 10%. As unfilled orders increase significantly, senior managers begin to worry about negative customer impacts and as a result, they frequently soon allow new hiring
- % of plant capacity utilized increases. When plant utilization is at or near an all-time high, it is frequently a signal for managers to begin hiring
- Warehouse inventories are decreasing by more than 15% or inventory turnover is up by more than 10%. When inventory stocks shrink or inventory turnover increases, managers frequently used that ratio as an indicator of an economic turnaround. This decreased inventory can trigger new hiring
- The number of products in beta testing or the number of products in the product pipeline increases. Assuming that the beta testing a successful, managers utilize this factor as an indicator that sales will soon dramatically increase as a result of these new product introductions
- Product development time (time to market) increases by more than 10%. This indicator sends a message to managers that product development teams may be understaffed to the point that it may hurt future sales and market share
Corporate culture related indicators – (possible "job growth" precursors)
- Number (and the length) of meetings increase by more than 5%. This can be a general indicator that managers are more optimistic about future growth
- The cost of the employee annual meeting or Christmas party increases by more than 3%. Although not a perfect indicator, in many cases increased "frivolous" spending is an indicator of increased management confidence in the company's future
- Travel to conferences increases by more than 5%. Another indicator of increased management confidence
- There has been a recent unfreezing (within the last six months) on internal purchasing (computers, travel, free food etc.) and/or the CEO/CFO has not written a memo requesting managers to cut costs for at least one year. This factor may be a precursor to increased hiring because frequently increase spending on equipment technology proceeds new hiring
* The numbers used as examples are representative of a large high-tech firm. Each one must however be adjusted to your organization’s particular situation and historical pattern
Part II – EXTERNAL INDICATORS OF POSSIBLE GROWTH IN JOBS – Patterns and pre-cursors within your industry which may provide HR leaders with some indication that your firm will be the next to begin hiring.
Few things in business are stable and unchangeable. In fact, almost all businesses and industries have up and down patterns. The key to success is not to wait until these trends hit you hard but instead to identify any precursors (warning signs) early on so that you can take action to take advantage of opportunities and soften the impact of upcoming problems. Fortunately, in most industries there are "leading and lagging" firms. Leading firms in an industry routinely begin hiring long before others in the industry (they may also lead in layoffs). Identifying these firms is particularly valuable if you are a small or medium-sized firm that routinely follows the leader in the industry. Your firm may be a "follower" because your senior management is less willing to take risks or because the customers of the leading firm are routinely the first ones to begin spending after an economic downturn. But, no matter what the reason, tracking what these leading firms do can give you a significant "preview" of what your firm will do in the upcoming months.
In order to take advantage of this leader/follower pattern, one of the first steps proactive organizations take is to look at multi-year hiring, work force reduction and sales growth patterns to see if a trend or pattern can be identified. For example, hiring growth often comes during certain times of the year (example — when the new fiscal year budget begins, hiring increases) or after certain external economic or industry events (example — industrial equipment suppliers enjoy increased sales long before consumer-products manufacturer's have an uptake in sales. It may also be true that, for example, large part suppliers will enjoy increased sales long before final product assembly firms do. Many industries have these lead/ lag patterns that consistently repeat over time. By identifying these patterns organizations can often determine the actual time lag between a certain event at another firm and the point where head count growth will occur within your own firm.
You should also note that there are certain industries that have unique "patterns". For example companies in the oil and gas industry can transition rapidly from relatively lean to “over staffed" when there is a rapid decrease in the price of the raw product. Managers can’t control (or even predict) the price of oil for example, but once it drops dramatically; they need to be prepared to rapidly cut headcount in order to remain profitable. And vice versa, when the price of oil goes up significantly, increased hiring almost inevitably follows.
a) Actions by "leading” firms within your industry
By monitoring the decisions of the historically "first to act" firms, HR managers can with some degree of confidence estimate when your own more conservative management is also willing to begin hiring.
- Profit or revenue growth increases by over 10% at leading firms and/or our major competitors. Obviously if you can identify firms that routinely increase profit several months before your firm, you can use this information to accurately forecast your own firms impending profit growth
- Large scale hiring by other "leading" firms in your industry. In some industries, "risk taking firms" routinely take the hiring plunge long before the more conservative firms. If you happen to be a manager at one of the lagging firms, you can use this information to predict when your own managers will begin large scale hiring
- Hiring freezes are removed at leading firms or across the industry again, identifying whether there is a predictable pattern can help you forecast what your own senior managers will do
- Competitors, both weak and strong, are already announcing higher earnings forecasts or increased sales. Since "a rising tide lifts all ships", increased growth in most of the industry will almost assure that any "lagging" firm will soon experience growth
- Employee turnover at "leading firms" or at your competitors increases by over 25%. Increased employee turnover can mean a higher level of confidence in beginning a search and a lowering of the unemployment rate. And in almost every industry, turnover rates vary in reverse proportion to the unemployment rate in the area
- When plant productivity/ employee output at leading firms reaches "lean and mean" levels, this can frequently serve as an indicator that new hiring is the only proven approach to increasing productivity
- Fewer firms close their plants or go bankrupt, while others open up new facilities. Increased openings and fewer closings can be a leading indicator of future growth patterns in the industry
- Suppliers are already announcing new hiring, higher earnings forecasts or increased sales. Suppliers frequently begin hiring months before the end user of their product, so wise HR managers can utilize this "heads up" to forecast their own future hiring needs
- Parking lots at leading firms show a decreasing number of vacant spots. A simple but easy to utilize indicator that indicates that leading firms are hiring
- Spending on R&D at our competitors increases by over 25%. Increased R&D spending almost always "leads" increased hiring in the rest of your firm
- The number of available jobs listed on our competitor’s web site increases by over 20%. Monitoring the number of new job postings can give you a precise indication of firm's hiring rate
- Companies begin giving larger raises. Similar to your own firm' s experience when you sought an increase in salaries, when leading firms throughout the industry begin giving raises again you can expect increased hiring
- Companies begin authorizing more overtime. Increasing authorization for over time throughout the industry can be an indicator that your firm needs expanded output. Eventually, firms that recognize the need for increased output will eventually increase headcount
- Firms increase the number of contractors and consultants they hire. Most firms traditionally increase contractor and temp hiring long before they authorize "permanent hires". And as result, the increased use of outside help at leading firms is certainly a warning sign for "lagging firms"
- Firms begin reorganizing their recruiting department and start hiring more recruiters. Because new directors of recruiting must be hired and recruiting plans and strategies must be revised, the reorganization of the recruiting function at leading firms is a predictable precursor that within six months they will begin significant hiring
- Firms begin emphasizing retention. When leading organizations begin refocusing their efforts on employee retention it's a safe assumption that they foresee upcoming economic growth and a lowering of the unemployment rate
- The percentage of employees in surveys that say they would consider looking for new job if it became available. When consulting firms release data that indicates that a large percentage of current employees in the industry will leave once the economy turns around, it is essential that the recruiting and retention functions at "lagging firms" also anticipate their own increase in turnover and subsequent need for new hiring
- Increased college visits, internships and college hiring by leading firms. Identifying the historical lag between increased college hiring at leading firms and your own, you can create an accurate indicator of when your own executives are likely to free up your own college hiring. Incidentally, college hiring frequently increases at least six months before experienced hires open up within an organization
b) Previous industry patterns
By taking a step back and looking at historical patterns within an industry that repeat over time, firms can identify leading indicators and then act appropriately long before any sudden hiring or turnover increase stresses your own recruitment system.
- “Leading firms" begin hiring. Most industries have leading firms that begin hiring long before the more conservative firms. If you are a recruiting manager at a lagging firm you can utilize past patterns to help predict the number of months before your firm is also likely to increase hiring
- In industries that undergo frequent boom and bust cycles – The number of years that has transpired since the last decline in sales and the need for layoffs
- In companies undergoing rapid growth – When company growth rates are increasing, this can indicate the beginning of the repeat of an industry pattern where rapid growth inevitably leads to intense competition and then massive layoffs. Wise HR managers realize upfront that all hiring booms come to an end and as a result, they structure their hiring and their strategies in order to minimize the likelihood of the need for layoffs as a result of over hiring
- In industries undergoing rapid technological growth –In industries where technology growth and obsolescence rates are continually increasing, HR managers must study historical patterns in order to make the connection between the rapid introduction of new technology and the corresponding growth and rapid hiring
- The number and the size of layoffs reported in industry lay off reports (AIRS, B Hodes for example) decrease by 10%. After a significant lag period, reduced layoffs can be indicators of upcoming hiring spurts
- The merger rate in our industry decreases by over 10%. Decreased mergers in an industry generally means less redundancy throughout the industry and increased hiring by individual firms that no longer have "surplus employee's" as a result of their recent large-scale mergers
c) External economic factors (possible job growth precursors)
When the over-all economy is growing, most individual firm’s eventually see a sales increase first and then, after a lag, an increase in hiring. Smart recruiting managers utilize their knowledge of this delayed relationship between the overall economic growth and hiring at any individual firm in order to help do forecast when they need to begin large-scale hiring. By identifying precursors to overall economic growth, directors of recruiting and senior managers can use them to "plot" the number of months until their own firm should begin hiring. As a result, identifying the relevant precursors and tracking them is essential if you want adequate lead time in order to build up your own recruiting capabilities to coincide with the economic growth. There are many economic factors that serve as precursors to a growth in sales and that eventually add headcount. Most of the important ones are listed below:
- Consumer spending increases by more than 5% (for retail/ consumer goods and service firms). Also if corporate spending increases (for industrial goods and service firms) and if government spending increases (for military and government goods and service firms). In each of these cases a growth in budgets or spending acts as a precursor to future hiring
- GNP growth increases by more than 10% in the US (and in countries in which your firm has a significant number of employees). Overall GNP growth is a solid indicator of future hiring
- The unemployment rate decreases by more than 10% (indicating that high turnover rates are inevitable). During periods of economic growth, if the unemployment rate falls below 5%, managers can be assured that they will encounter significant turnover. This increased turnover will of course also mean increased hiring needs for replacements
- Consumer disposable income increases by more than 10%. In many consumer related industries, there is a direct connection between the growth in disposable income and future hiring
- Consumer confidence increases by over 10%. In consumer related industries, there is a direct connection between increasing consumer confidence and future job growth
- Currency valuation/international exchange rates shift (in either direction) by more than 10%. Any significant fluctuations in the value of international currencies can cause senior management to become uncertain about the future because minor fluctuations in currency can have a dramatic impact on profitability. The net result of this uncertainty is often a reluctance to increase hiring even though the company is undergoing sales growth
d) Stock market indicators and patterns"
- Analysts' recommendations to buy our stock improve. Positive analysts recommendations can be directly connected with a growth in stock value and increased future hiring
- Stock price indexes (NASDAQ/ Dow Jones) increase by more than 10% over a six month period. As the overall stock market improves dramatically, so do individual stock valuations and these increases in valuations can eventually lower turnover rates because of higher stock option values and increased manager confidence in resuming large-scale hiring
The above list of possible leading indicators can be a valuable tool for recruiting managers to determine when the next round of hiring is likely to begin. If you study historical industry patterns you can generally tell which indicator has the most impact in your industry and company. If you spend the time to study your industry and firm over time, it's highly likely that you will be able to identify repeating "patterns" of up-and-down hiring cycles. These repeating patterns are fairly common and once you identify them, it is relatively easy to utilize this list to identify the specific precursors to job growth within your firm and industry. By identifying the number of months between the occurrence of these leading indicators or "warning signs" and the resumption of large-scale hiring, you can get a pretty good rough estimate of how far away from the next hiring cycle you are. At most firms, it's possible to get your forecast accuracy of the next boom to within a three to six month window. Then all you have to do is make the case for increased budget then rebuild your recruiting strategy, department and staff in time to meet the predicted date.