10 tips to get people management right in a downturn

As the economy slows, getting staffing right will make or break your business. MIKE PRESTON explains how to lower staff costs, get rid of the underperformers and protect your stars.

By Mike Preston

As the economy slows, getting staffing right will make or break your business. Here’s how to lower staff costs, get rid of the underperformers and protect your stars.

People management is a challenge at the best of times, but when the economy turns bad, making the right human resources decisions can make the difference between survival and destruction.

The challenges come in many forms. Not only are there many tough calls to be made – on issues such as staffing numbers, incentive structures and recruiting strategies – there is often scant information about the economic and business outlook to base them on.

Business owners and managers need to do some crystal ball gazing, and they need to do it now. The signs of slowing economic growth are mounting by the day, with retail sales, car sales, profit growth, building approvals and business and consumer confidence all heading south.

To complicate things, the skills shortage also needs to be taken into account. The labour drought has changed hiring and firing practices, with some businesses “warehousing” employees anticipating future need and others operating with little more than a skeleton staff.

All that means the looming period of slower economic growth presents opportunities and threats for business owners.

Here are 10 tips to help business owners get their human resources strategy right in tough economic times.

ONE Head to the factory floor

Before making any big decisions, it is first necessary to develop a clear picture of your workforce. That means getting out of the office and getting down to the coalface.

Andrew Banks has survived through more than one downturn in a career as an entrepreneur in the fields of recruiting and human resources stretching back more than 20 years. Now running human resources firm Talent2, among other things, Banks says business managers often don’t have the information they need to make good decisions.

“It is the job of business leaders and managers to know exactly how well their people are doing, but over the years I’ve been persistently underwhelmed by how little medium and large business in particular know about where their high performance is coming from,” Banks says.

Poor performance management and measurement systems can be disguised by strong business conditions, but during down times a lack of solid information on workforce performance can lead to poor decision making.

“People sometimes end up making big decisions on what really comes down to little more than a gut feeling, and if you retrench half your workforce on that basis, that could be the worst thing you ever did,” he says.

This view is shared by Jim Downey, the principle of insolvency practice JP Downey & Co. He says the failed businesses he encounters in his work are often characterised by a management that are isolated from their workforce.

“Managers have to be out on the factory floor talking with people and gauging first hand how busy people are and how that matches up with the work volumes you expect. It is all too easy to sit in your office and pretend there is no problem out there until it is too late,” Downey says.

TWO Make the hard decisions

Once you’ve got a solid idea about your workforce’s capabilities, a quick decision needs to be made about whether cuts need to be made to get the business through the tougher times ahead.

A common although understandable mistake made by owners and managers of businesses that flounder during slow times is to delay hard decisions on downsizing their workforces, Downey says.

“You can understand the reluctance of employers to take the knife to their workforces,” he says. “It is a terrible decision to have to make, and particularly hard when views on the economy are vacillating between optimism and pessimism.”

The fact is, however, that sometimes a declining market and reduced workflow mean a business must reduce the size of its workforce by making employees redundant – and if it is a necessary step, the sooner it is made the better.

“If a business is struggling it is decision that needs to be made early in the piece. The longer you defer, the more expensive it becomes – pay rates go up, entitlements are accrued and then there is the multiplier of superannuation on top of that. It requires substantial dollars to make someone redundant and a time to recover from the short-term pain involved,” Downey says.

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THREE Identify and protect core skill areas and top performers

If the decision has been made that downsizing is necessary, one of the first things to consider is just where the cuts should fall.

Inevitably there will be parts of the business, and individual workers, that perform better than others. But because redundancy is a process that targets job roles rather than the performance of individuals in those roles, careful consideration needs to be given to how a redundancy process is conducted to ensure key staff are not lost.

Tim Roche, regional practice leader with HR consultancy Right Management, says smart business owners and managers will think well in advance about whether valuable employees should be repositioned within the business to areas where they can make a greater contribution.

“If an organisation is going to these kind of big changes they should be planning a minimum three months out, so you need identify talent that you want to retain and make initial changes very quickly,” Roche says.

He emphasises that any changes made in the lead up to a redundancy process have to be for genuine business reasons and can’t be used to target individuals.

FOUR Voluntary or forced redundancy?

One of the biggest choices business owners and managers have to make if they are planning on downsizing is whether to opt for a voluntary or forced redundancy process.

Voluntary redundancy can have the benefit of taking less of a toll on workplace morale, but it comes at the cost of reduced control over the process.

Right Management’s Roche says in all but the most exceptional circumstances, forced redundancy is the smarter business move.

“In my view, if you go ahead with voluntary redundancies you’ve got rocks in your head,” he says. “I saw it a million times in the early ‘90s dealing with public sector privatisations; they’d conduct these voluntary redundancies and all the talent would take the money and walk out the door because they backed themselves to find another job, and in the meantime you’re left with the deadwood.”

The industrial instruments applicable in a workplace can also be important in determining how redundancy processes are conducted. Roche advises that businesses obtain legal advice well in advance of commencing a redundancy process.

FIVE Communicate, communicate, communicate

Whether because of a painful event such as downsizing or the uncertainty that comes with difficult economic times, keeping staff happy and engaged can be a big challenge.

The problem can be made even worse if business owners and managers give in to the temptation to pull their heads in, cut off the lines of communication and wait in the bunker until things take a turn for the better.

Paul Lahiff, chief executive of national mortgage broking franchise Mortgage Choice, says communication is the key if businesses and staff are to make it through rocky patches relatively intact.

Lahiff is well positioned to comment on the importance of communication in tough times – as a Westpac bank senior executive in London in the early ‘90s, he helped downsize an 800 strong workforce to less than 200.

“People aren’t stupid. They’ll know if conditions have changed, so as a leader your job is to be very transparent and constantly communicate,” Lahiff says. “There is a temptation to hide away, but it is the worst thing you can do. If you not are upfront from the beginning you just create a vacuum that others will fill.”

Lahiff is putting that lesson into practice at the moment as he works with Mortgage Choice franchisees currently wrestling with cuts to their commissions recently imposed by some banks.

“It’s not something you can do by email. In the past month I’ve visited each capital city twice and spoken face-to-face with franchisees and staff and been open with them about the fact that we face a tougher environment and why I think we’re well placed to take advantage of it,” he says.

SIX Use flexibility to cut staff costs

Downsizing is just one potential response to a market downturn. Especially given the skills shortage plaguing many businesses, implementing measures to try and take the edge off staff costs will often be a better option.

Martyn Strickland, managing director with corporate turnaround specialists 333 Capital, business should consider the viability of shifting the workforce mix towards contractors and part-time or casual staff.

“If you’re a business that can see trouble ahead, one of your best defences is to have flexible workforce. Casual and contract staff allow you to size up or down depending on the workflow, and I think quite a few companies with risk in the revenue should be thinking about their staff mix right now,” Strickland says.

Other more temporary forms of employment flexibility can also help employers get through tight periods without losing key talent. Mercer Human Resource Consulting business leader, human capital, Ken Gilbert suggests approaching staff to see if a mutually beneficial downshifting can be arranged.

“In times when your staffing levels need to be reduced, you can ask employees if they’d like to shift down to two days per week for the next six months, take some unpaid leave to travel or take on some study to increase their skill base. Increasingly people are interested in making those kind of moves, especially in the Gen-Y age bracket,” Gilbert says.

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SEVEN Adapt your reward structures

Employee reward structures can be a useful tool for sharpening your workforce to better difficult economic circumstances.

Good employees are always valuable, but high-performers that can help you grow your business against the broader market trend are like gold – and should be rewarded accordingly.

Gilbert argues that equality is a principle underlying many businesses reward structures, but this will often not be appropriate for tough times.

“In these circumstances you need to make hard decisions and perhaps reward critical, high-performing staff more because they are driving the survival of your business,” Gilbert says. “What you might do is pay less at the lower levels but significantly more on a performance-linked basis for those at the higher levels, so you really drive added value to the business.”

If a business is restructuring, you should consider re-aligning reward systems towards outcomes connected with the change, according to Michael Fingland, managing director with turnaround management firm Vantage Performance.

“Bonus schemes focused on top line sales or profit may be inappropriate in a turnaround context,” Fingland says. “If you are restructuring, (a focus on) internal objectives may be more important than growth, and key performance indicators should reflect that, if only for a 12 month period.”

EIGHT Share the pain

And speaking of changes to benefits and rewards, Fingland makes the point that it can be destructive to staff morale if senior managers and executives aren’t seen to be sharing the load.

“Credibility depends on being able to identify those senior people that have lost the trust of their staff or don’t have the skills to manage, and demonstrating to staff that you’re prepared to cut them out,” Fingland says.

There are also often efficiency dividends to be gained from a thorough review of management staff when a business is struggling.

“Nine times out of 10, the business is where it is because of management, whether it’s because they weren’t quick enough to act or just didn’t see the signs; so that is the first place we look in a turnaround context,” he says.

NINE Make sure your best staff are at the sharp end

When the market is booming, many businesses concentrate their best staff in growth-focused areas, such as sales and marketing, but in tight times a shift in focus may be in order.

333 Capital’s Strickland says the struggling businesses he advises often have the wrong people in the wrong place.

“When things get tough, you need to focus on getting cash in the door. Make sure your people are chasing debtors, making payables and working on tightening inventory – they are particular skills and those areas need to be covered,” Strickland says.

TEN Accentuate the positive

Gloom may be the dominant sentiment that accompanies market downturns, but that shouldn’t distract business owners and managers from the many opportunities that may also be presented.

If the economy is slowing, consider whether competitors may have let the wages and conditions they offer key staff fall behind what the top of the market is prepared to pay. If so, it could be an opportunity to make them an offer they can’t refuse.

It can be difficult in tight times to make the decision to hire a new employee on a big wage, but given that the skills shortage is likely to ease only slightly, even in the event of an economic slowdown, it could be a golden opportunity.

This is precisely the view that Mortgage Choice’s Lahiff is taking in the current difficult climate facing mortgage brokers.

“Our view is that in these times you can either batten down the hatches or say ‘listen, this is great time to get in front of the competition’. To do that you need good people on board and we’re more inclined to take a chance and grab them if other people are slowing down, even acknowledging the risks associated with that,” he says.

And even if the Australian economy does slow down, it is likely to remain relatively strong compared to the other developed economies. That means it could be a good time to investigate recruiting overseas staff, particularly for businesses in hard-hit sectors such as finance and property services.

Read more tips to help your business survive a downturn