The Next Recession and Living with Business Cycles
HR and business cycles
At the low point in the business cycle, most companies seek to cut employee costs. But what are the best approaches? And how can common mistakes be avoided?
It is firstly important to take note of the bigger picture:
The logic of downsizing
Every company needs to take periodic stock of its manpower and skills mix. Downturns act as a convenient imperative to optimise productivity and go back to basics. However, downsizing is a skill that HR managers have to relearn every few years and which they will usually have acquired through trial and error rather than through formal training. It is not a subject that many managers contemplate with relish and therefore little shared knowledge has developed either within or between companies on the best way to carry it out.
Guidelines for completing a successful downsizing exercise
Other prime targets are:
Who should carry out the redundancy dismissals?
In many companies the roles of the HR function and/or corporate lawyers are restricted to advising line managers on the conduct of redundancy dismissals and handling the detailed administration of dismissals that have already been decided. This can give rise to problems as individual managers lapse into favouritism, ignore contractual clauses or seek to skirt around statutory obligations. They may not be able to judge when it is essential to involve internal counsel and their failure to do so will almost certainly result in a string of unnecessary litigation at a difficult and sensitive time for the business.
The wisest approach is to make the downsizing process an area of joint accountability in which the HR adviser and/or corporate lawyer plays a central role. In addition to following appropriate legal procedures, it will also be important to ensure that:
With the arrival of every new task comes the question: Is it more cost-effective to achieve a desired goal through capital investment or through human labour?
It has been shown by many academic analyses that capital is around four times more successful in generating value added than a purely human solution. Thus, as companies become more capital-intensive, it will be tempting for line managers to see the contribution of human labour as less valuable and more expendable. However, the true position is quite the reverse. The people who remain in a business are likely to be more important and progressively directed towards tasks which can only be effectively carried out through human interaction, whilst the skill levels of remaining staff will also rise over time.
Greater capital intensity reduces the scope for a business to solve problems arising from variations in the business cycle through short-term recruitment or redundancy programmes. It is also likely that as labour displacing technologies are introduced across a wider range of tasks there will emerge a whole new raft of restrictive laws and tax systems aimed at such investments and making it more attractive to retain staff.
Labour costs are already a relatively small proportion of total corporate costs in most utility and many manufacturing businesses. The automation of service functions and the growth of self-scanning in multiple retailers will soon extend this growing inflexibility to all employers in the developed world. For this reason, it is critical that companies learn to live with business cycles and take a longer-term strategic view about corporate costs – with a greater focus on identifying key talent in the business, customizing individual employee packages, managing suppliers and optimizing capital assets.
The next recession
From a historical economic perspective, the next downturn is now clearly due. However, there is no sign yet from the OECD’s longer-leading predictive indicators that such an occurrence is on the immediate horizon. However, there is every possibility – as in 2007 – that a sudden downswing may occur due to a sudden and tragic world event, a rapid rise in price inflation, the overstretching of consumer debt, or that a speculative run may take place on stock markets. The first signs of future problems can be seen in the fall in retail sales and the sudden declines in profitability of major retailers. We should add to this the emergence of trade wars and steel tariffs – plus the destabilising rift between Russia and the rest of the World.
FedEE® economic experts’ view is that a serious economic downturn has a greater than 50% chance of commencing by the Summer of 2020.
Copyright: FedEE CSL 2018