The biggest mistake is to focus solely on cost reduction without regard to value. It’s a lot like focusing on expense instead of return on investment.
If you don’t come out of this recession with a much more valuable workforce, you’ve missed an exceptional opportunity.
If you must downsize, you can improve the overall value of your workforce by letting go the weakest performers. That’s weakest performers, not those with the highest pay rates, or those with the least seniority.
The Wall Street Journal ran an article a month or so ago about how companies in this recession are letting go less capable and less experienced performers – not the more experienced (and expensive) people the way companies have done in previous recessions.
- HR or legal want to go by seniority because it’s “only fair” or it will prevent employment complaints. You know who the best and worst performers are right? You’ve got a good performance management system, right? One that differentiates based on performance outcomes, right? If not, you’ve got remedial work to do because that is affecting your ability to manage your key asset.
- Finance is telling you to chop the most expensive heads to reach cost-cutting objectives faster. The assumption is either that all people are of equal value, but come with different price tags, or the only thing that matters is cutting costs. You want to focus on value, not short-sighted and one-sided views of generating business value.
- Managers are saying they want a cookie-cutter approach. They don’t want to make the difficult choices necessary. A financial services firm wanted to use the same seniority-based approach across the board. The reason given was that it would be more fair. For whom? For the high performers with loads of experience who happened to be hired recently? To the long-service employees who are in the in-office retirement program? What it came down to was the managers wanted someone else to make difficult decisions for them by using an “objective” criterion that does not serve the business, but makes their jobs easier.
- Managers want complete freedom to pick favorites. This is the flipside of #3. They’re either managers who truly want to select the weakest people, or they’re the insecure and autocratic type who want to surround themselves with rotomontades. You can tell the difference – the latter type get defensive about their picks.
What to do:
- Make sure you have a good performance management process – one that produces documentation that differentiates based on performance. It does not have to be sophisticated, complex, or comprehensive. It just needs to evaluate how well someone is doing, and provide guidance on how to improve.
- Stay focused on value. Seniority and pay level don’t matter as much as overall value. What value is years of seniority if the performance isn’t there? What value is a high pay rate if the value received is high?
Let me get this straight:
A business unit loses $40.5 billion in one year, causing the company to nearly collapse, and jeopardizing the world economies. The government provides up to $173 billion in public funds to bailout the company. And key company employees are getting about $450 million in bonus payments.
The company claims the bonuses are “retention” payments, even though 11 of the employees receiving $1 million or more each are no longer with the company.
- Does this make any sense to anyone?
- What would these employees get in a good year?
- Why retain the very people who caused this mess?
- Did the government do any due diligence before throwing an enormous amount of public funds at the problem?
- Who designed this bonus program?
- Who approved this bonus program?
It gives “pay for performance” a whole new meaning.
Hewlett Packard was launched (from the famous garage) in the middle of the Great Depression. So was Sentry Safes. It’s when Birds Eye took frozen food to market for the first time, and Fortune Magazine began. Television, nylon, fiberglass, and synthetic rubber were all introduced then.
After World War II, and during a severe economic crisis in Japan, Toyota figured out how to fund car manufacturing by minimizing the cash tied-up in inventory. The Toyota Production System led to the quality movement and lean manufacturing.
During the 1990-1991 recession, Michael Dell perfected his demand-pull production system, Intel launched their “Intel Inside” campaign, and Kodak was at work on the first digital camera for consumers. It’s also when we first saw dial-up internet access, the first internet browser, and DVDs.
In 2001, Apple launched the first iPod. Steve Jobs said they increased their investment in innovation at that time, and they’re doing the same in this recession.
What’s your excuse for holding back on innovation today?
Strategy #3: Reducing HR Costs
Many companies still haven’t transformed their HR area to reduce costs and improve support to the business. Cost reductions of 25% are possible and the change in HR from administrative transaction processor to business partner significantly helps line managers.
- Examine the possibility of self-insuring benefits such as dental or optical coverage.
- Consolidate human resource or training functions in the field where appropriate.
- Streamline HR processes and procedures such as the approval process for hiring, transfers, and performance appraisals.
- Employee performance appraisals are generally more effective and less time-consuming if held on a quarterly or semi-annual basis, rather than annually.
- Reduce duplicate paperwork, data input, and manuals.
- Automate HR functions via internet applications, for example benefit enrollments.
- Push more responsibility onto vendors.
- Renegotiate vendor contracts.
- Outsource selected HR functions such a payroll, benefits administration, training, or recruitment.
- Restructure HR to provide new challenges and improve efficiencies through new HR staff performance goals and accountabilities.
For a copy of the full report click here.
Strategy #2: Involve Employees in Cost Reduction
Many good ideas can come from employees because they see waste and inefficiency up close. Companies such as Allied Chemical, Coca~Cola, General Electric, and General Foods have saved millions of dollars in energy, time and material costs by tapping employee input.
Ideas to Consider
- Have each department sit down with employees regularly to identify cost saving opportunities.
- Consider using a facilitator as many times employees don’t want to offend managers or supervisors. For example, in one company I know, employees were uncomfortable speaking up about a time wasting project management process because the CEO created the process and was notoriously defensive about it.
- Choose to act on the opportunities that have the best combination of high payoff and low effort needed to implement.
What to focus on
- Energy saving ideas
- Operational inefficiencies
- Duplication and overlap of effort
- Internal reports
- Unnecessary meetings
- Opportunities to share best practices
- Options to eliminate positions when people leave or retire
- Ways to reconfigure jobs to improve outcomes
- Benchmarking to identify opportunities through better practices.
Next: Strategy #3 — Reducing HR Costs
For a copy of the full report click here.
If your objective is to reduce people-related costs, layoffs are a fast way to go. But many companies are looking for ways to reduce costs without losing good talent. Here is a summary of our report on optional strategies that could be used with, or instead of, layoffs and are proven effective in reducing people-related costs. For a copy of our full report including more cost reduction tips and techniques click here.
Strategy #1: Alternatives to Layoffs
Laying off people means losing the investment you’ve made in hiring and training. It will cost you more to replace the lost people when growth resumes — if you can find similar talent. Additionally, layoffs can damage trust, respect and loyalty, as well as create high stress levels. Sometimes they’re unavoidable, but consider these alternatives.
- Cut overtime.
- Cut or reduce travel, purchases of office supplies and equipment.
- Reduced workweek. Nevada casinos recently instituted four-day workweeks as has Pella Windows, AK Steel, the City of Atlanta, and various hospitals.
- Eliminate or scale-down annual celebrations. You can still celebrate achievements, but be consistent with the cost-reduction theme.
- Hiring freeze.
- Reduce/eliminate bonuses.
- Unpaid vacations. Dell is offering employees up to five days without pay through January. Honda is also offering voluntary unpaid vacations for U.S. employees.
- Voluntary or enforced furloughs. The Seattle Times mandated a week of unpaid furlough for 500 workers amounting to $1 million in savings.
- Salary or wage freezes.
- Merit increase freezes.
- Pension cuts.
- Suspend 401(k) matches, as Kodak announced recently.
- Offer flexible work schedules to reduce hours.
- Cut pay by some percentage across the board. Motorola recently implemented salary cuts.
- Schedule a work shutdown. Cisco planned a four-day end of year shutdown.
- Exit incentives to encourage voluntary quits (Watch out — you might lose the wrong people with this one.)
- Offer additional time off instead of pay increases.
Next: Strategy #2 — Involve Employees in Cost Reduction
For a copy of the full report, click here.
A Forbes reporter called me, having found an article I wrote online about managing in a recession. If there’s one thing we know for sure about humans and change, they resist change that they do not control. Plus it adds to anxiety and stress levels. A downturn in the economy, especially one like we’re seeing now, will elevate stress levels everywhere – not just in those being laid off. So, what does that mean for management? Plenty. It’s important to communicate, and to show leadership. Leaders don’t hide in crisis – that only increases anxiety. Instead, leaders talk about the situation and focus on what IS in their control. Keep people focused on what’s important – priority setting is even more important now. The article that caught the Forbes reporter’s attention is here: http://www.leggecompany.com/Managing%20During%20the%20Recession.pdf
And here’s the Forbes.com piece: http://www.forbes.com/2008/10/16/tough-times-management-lead-careers-cx_mk_1016bosses.html