Any company that attempts short-term "stopgap" measures to reduce labour costs only to be forced to make large-scale public layoffs later "has to be classified as a workforce planning failure", says HR expert Dr John Sullivan.
In a "rant" on the topic, published on US website ere.net, Sullivan says that despite the cyclical nature of the economy, HR and talent managers fail to learn from past experience and "appear to be making it up as they go, all in an attempt to avoid layoffs".
This demonstrates, he says, "why [HR] shouldn't have a seat at the table; they struggle to deal with a predictable and reoccurring problem, economic downturns, and the related need to dramatically cut labour costs".
Sullivan notes that just as retail managers add employees for the busy season and "release" them when demand subsides, HR professionals need to be ready with a plan to hire and develop more people at times when business is good, and to be able to painlessly cut labour costs and "right-size" the organisation when revenues decline.
"Just because they don't occur at the exact same time every year is not an acceptable excuse for being unprepared."
HR too "positively oriented"
The problem with many HR functions, Sullivan says, is that they "are so focused on day-to-day operations and are so 'positively oriented' that frequently they don't even want to think about the periodic need to conduct layoffs".
All other managers in a business routinely face up to the fact that they must periodically reduce costs, he says. "Because the total cost of employees is often 60 per cent of all variable costs within an organisation, it should never come as a surprise that the firm's largest single expense item would be first on the chopping block when revenues decrease."
Sullivan accuses HR departments of trying things "almost at random" (like hiring freezes, voluntary buyouts, and leave without pay), "even though these 'stopgap' methods almost always fail to prevent the ultimate HR failure: large-scale public layoffs that dramatically damage the firm's employer brand image".
When HR is pushed to reduce labour costs, "more times than not, they react emotionally rather than logically, which is a poor substitution for collecting data and figuring out the best ways to cut labour costs without negatively impacting productivity", he says.
Instead of an "ad hoc" cost-reduction program every downturn, Sullivan recommends "three effective solutions that enable rapid labour cost containment":
A fixed contingent workforce percentage program. "Where workforce headcount growth and labour cost reductions are both handled through the use of a fixed percentage of labour cost being allocated to contingent labour. This approach uses a combination of variable cost outsourcing contracts and the hiring or releasing of temporary or contract workers to meet the required change in labour costs (Google and Microsoft are benchmark firms)."
A continuous reduction plan. "Under this approach, surplus labour (usually bottom performers and those with obsolete skills) are proactively released each quarter (Cisco is a benchmark firm)."
A SWAP process. "This approach is designed to continually improve your talent pool without changing headcount. Using the SWAP approach, bottom performers and those with skills that are no longer needed are replaced whenever a high potential recruit is found. The net result is an overall increase in productivity and skills with no net increase in headcount (Slide is a benchmark firm here)."
Sullivan recommends that HR professionals use a simple, two-part process to alert them to warning signs before they need to reduce labour costs:
Identify first-action firms. In every industry, he says, there are repeatable historical patterns where certain companies act first to either reduce their labour costs or increase their hiring. HR professionals should monitor these as well as key economic indicators like unemployment rates, interest rates, or consumer spending rates.
Determine the ideal labour-cost-to-revenue ratio. "If, for every $60,000 in labour costs, there should be $100,000 in revenue (a 6:10 ratio), you know that when the ratio reaches 8:10, it's time to reduce your labour costs. In the opposite direction, when the ratio reaches 4:10, you know it's time to consider new hiring. Alternative ratios include your average revenue per employee and the percentage of all variable costs that are spent on all of the various types of labour."
Other steps HR professionals can take include:
Work with managers to identify jobs that should not be reduced, even when revenues drop. "These 'protected' jobs might include product development and sales. Individuals in these jobs should be informed of their relative job security in order to avoid unnecessary anxiety."
Identify the jobs most likely to be declared 'surplus' whenever revenues and workloads decrease. "Typical jobs that are likely to have surplus employees might include customer service, supply chain, and production employees. There should be an absolute requirement that a fixed percentage of these jobs that have a high potential for becoming 'surplus jobs' will be filled by contingent workers that are more easily released."
Make the internal redeployment and transfer process more proactive. "Not only should the process be sped up, but individuals with key skills should be proactively 'moved' from low priority and low-impact jobs to roles where these employees will have a higher ROI."
Make labour cost-reduction decisions more fact-based and metric-driven. "Whenever any labour cost-reduction program like furloughs or voluntary buyouts are administered, use metrics to assess how effective they really were in cutting overall labour costs, while documenting their impact on morale and productivity. By collecting data, you can avoid implementing expensive stopgap measures that end up causing more harm than good."