Retain employees to thrive in the new economy

Written By David Macauley

On June 18th, the Bureau of Labor Statistics (BLS) released updated data showing employer spending on employee compensation through March, 2020. Now perhaps my emotional scar tissue is showing from all the recent conversations with friends and family whose livelihoods have been impacted by Covid-19, but I found myself bristling at the language.  At some point in our professional lives, we all hear some version of the phrase “our employees are our greatest asset.” And yet, human capital is never listed as an asset on the company balance sheet and employee compensation remains the largest expense item for most firms. 

With BLS data showing that employee wages accounted for 62.2% of employer costs, it’s no wonder that many employers have looked to their largest cost center first to trim expenses when forced to embrace austerity.  Many hope that comparatively small staff reductions will create enough change to the bottom line to leave the rest of the organization and the business model alone.  While the reasoning and mechanical logic of this idea is sound, it ignores a very important detail: people are not mechanical parts that fit neatly into larger machines.

The knowledge, skills, and relationships that create synergistic growth for firms in good times mean that when employees are let go, they leave a much larger hole in the fabric of the organization than their missing productivity.  Teams are greater than the sum of their parts and leaders should expect the loss of these interaction effects to impose additional opportunity costs to the firm.  The impact of lost knowledge, lost relationships, workarounds, and reduced employee morale continues to impact firms long after the cost cutting measures are complete.  Assuming the firm will need to staff up again, there will also be additional future costs to acquire, train, and assimilate new employees.  So, while the size of the hole left in the business by the loss of any one individual will vary, leaders should expect that staff cuts will have outsized negative effects on operations going forward. 

To be fair, layoffs, buyouts, and other forms of staff reductions can make the difference between life or death for some firms.  However, it fits much better in the leadership toolkit as a last resort than a “go-to solution” for dealing with downturns.  The good news is that there is no reason to amputate, when more careful surgical interventions remain available.  Here are 4 strategies to survive and thrive in economic downturns that businesses can try first, instead of cutting staff:

1. Prepare ahead of time:

While it is tempting to dismiss this strategy as too-little-too-late, there is much more to this idea than a trite turn of phrase.   A series of articles that began appearing in the Harvard Business Review in 2018 and 2019 synthesized the lessons learned and proactive steps that businesses took prior to the Great Recession.  Firms that prepared for adversity before 2007 and before other recessions positioned themselves to not only survive the downturn but to thrive and outperform the competition by double digits coming out of it. The critical preparation elements below make all the other strategies in this article more effective.  However, even for businesses that were caught unprepared by the current crisis, knowing these steps can help make up for lost time:

-    Use scenario analysis for decision-making to enable early and decisive action: developing contingency plans as part of your standard decision-making process means that plans are already in place when downturns occur.  No time is wasted figuring out what to do if you already have a plan for how to respond when actual results fall below projections. 

-    Practice participatory decision-making: effective leaders rarely go it alone but there is a science to involving others when the speed and decisive action are critical. Trying to develop this skill during a crisis is like waiting until you are halfway through an exam to study.  Once you are in the soup, it is too late to refine the skillset that your team will use to tackle the challenge.

-    Establish clear communication channels and protocols: you must be able to communicate clearly during a crisis and be transparent about the issues facing your company.  Employees need real time information and an understanding of the broader context of their role to make good decisions on the job.  Employees also need to know how to pass along critical insights, observations, and solutions to company leaders quickly and in a format that can quickly be understood and utilized for decision-making.  Building these systems in advance allows leaders to focus on the quality of communication without the distraction of also having to figure out the best way to deliver and receive it. 

2. Focus on operating costs and business fundamentals:

The ability to quickly reduce operational expenses is the typically the first predictive indicator to appear for firms that ultimately are able to thrive during and after recessions. However the ability to do so at all, let alone quickly in response to crisis, requires leaders to draw on multiple competencies to inform their decision-making.  Specifically, they must be able to:

-    Disaggregate operations: many businesses manage to a single bottom line, averaging multiple product and service lines together to determine overall profitability.  If overall sales and profitability continue to grow, all is assumed to be well as the “a rising tide lifts all boats” within the firm.  However, this means that in good times, growing profits end up covering a multitude of businesses sins that hide beneath the surface until the reversing tide and shrinking profits expose them. 

Within any firm there will always be differences in performance, expenses, and profitability associated with different product lines, services, locations, and operations.  These differences will be magnified as each product or service line and company location is impacted differently a during downturn.  Leaders must be able to see which areas of the firm continue to be strong performers and which areas are struggling by product, service, and location.  Managing to a single bottom line using company-wide averages does not work in a downturn.

-    Tighten your focus: the quickest way to decisively reduce operational expenses is to know what activities to stop doing.  Once the firm has disaggregated its operations, it can examine internal data to identify under-performing assets, services, and product lines.  Once identified, they must look to the foundational elements of their vision, mission, values, and business model to quickly decide:

  • What assets, product lines, and services to sell off, close, or pause for later use

  • Where to redeploy freed up human capital to leverage the strongest performing assets, product lines, and services

  • What processes can be simplified or redesigned to correct performance issues

  • Where to adopt digital tools and analytics to track and monitor progress

-    Share the pain: rather than laying off workers, consider temporary reductions in pay instead.  If you have successfully established your communication system, everyone in the organization will be aware of the severity of the situation. You may be surprised to learn that your employees would prefer to see a temporary 10% reduction in pay to maintain the health of the company during the crisis than have to permanently say goodbye to 10% of their colleagues.  These preferences may be magnified when leadership and other highly compensated staff take the lead with larger pay cuts than lower paid rank and file employees. Firms can successfully use this to achieve short term cost reductions while retaining skilled staff.

3. Take care of your war-chest:

Cash is king in a downturn and maintaining adequate cash reserves is another critical indicator of businesses that will ultimately go on to succeed.  Even in crisis, businesses rarely falter for lack of opportunity.  They struggle when cashflow is insufficient to meet obligations or buy enough time to wait out the crisis.  Maintaining and even growing your war chest will depend greatly on:

-    The reserves you built before the crisis: this is another area where preparation matters.  However, even if your firm is did not follow Apple’s example and amass a ton of cash, it’s never too late to start adding to your cash reserves.

-    Review your accounts receivable and outstanding invoices: it is surprising how often small to mid-size businesses lose track of who owes them money and how much is owed.  Reach out to those that owe your firm for services rendered and politely remind them that you expect payment.  Not sure if they can pay their tab?  Consider offering them a discount for prompt payment.  It may well be worth it to you to have cash in hand sooner and a retroactive discount may just be a lifesaver for their business as well.  After all, collecting a discounted payment beats the tax write off for uncollectable debt owed to you. 

-    Review your accounts payable: if you owe vendors, consultants, or other businesses for services don’t be afraid to contact them and apprise them of your situation.  Is your bill due in 30, 60, or 90 days?  Ask them if they will take payment early in exchange for a discount.  Best case scenario: you may find discounts that you can use to pad your cash reserves.  Worst case scenario: you pay the bill you already own on time and in full.  It pays to ask.  

-    Harvest cost savings from operations: once you have tightened operations, sold or divested underperforming assets, and focused on what’s working, harness those operating efficiencies to grow your reserves.  Decide in advance what percentage of any asset sales or cost savings you want to direct to your reserves and maintain that discipline.  Regardless of how fast or slow your reserves grow, you’ll be glad you have them later. 

-    Aggressively eliminate structured debt: today’s ultra-low interest rates may make borrowing look very attractive.  However, downturns are NOT the time to take on additional debt. Take advantage of low rates to restructure existing debt, lower payments, and pay off debt faster but be sure to avoid adding additional debt to the business.

4. Find and invest for growth:

Cost cutting will never ensure the long-term health of your business.  In the BCG Henderson Institute study that inspired the 2019 Harvard Business Review articles, the authors showed that finding ways to grow revenue had twice the explanatory and predictive power as cost cutting when it came to predicting which firms would ultimately outperform their peers coming out of past recessions.  To find revenue in a downturn, leaders must be able to:

-    Identify and grow their most profitable product and service lines: once operations have been broken down by product line, service, and location many organizations discover that one or more previously under-utilized offerings have maintained or grown demand and profitability.  It is critical that these products and services be identified quickly and expanded to make up for weaknesses in other areas. 

-    Let shareholders wait while you focus on customer value: priority number one in a downturn is to maintain and deepen relationships with your best customers.  Retaining customers is almost always more cost effective than sourcing new ones, especially if you have cut back on marketing expenditures after reviewing your operations for cost efficiencies. Retaining loyal and high value customers is not only crucial for preserving revenue in the short run, it they are critical to identifying sources of future revenue as well.

-    Set aside a portion of your war-chest to invest in R&D: downturns are the perfect time to elicit feedback from your best customers.  It is an opportunity to identify the needs, pain points, and wish-list items that are most central to your customer’s core business.  Finding new and better ways to solve these fundamental challenges further increases customer loyalty as you make their business better, faster, or more resilient.  The solutions that align with your firm’s vision, mission, and capabilities are the seeds you must plant now to come out of the downturn stronger on the other side.

The worldwide economic impact from Covid-19 may well eclipse the importance of the Great Recession in the history books.  However, the lessons learned from businesses that successfully rose to the challenge then are freely available to help leaders rise to the challenge today.  The application of these four strategies will be unique to every business but the underlying lessons are universal.  Those who do it well will be rewarded.  It won’t be easy but outside perspective can help.

Let’s get to work!

David Macauley
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