Employers are tightening their belts in response to economic challenges, but there are some investments that need to ramp up during challenging times in order to avoid compromising the employee experience.
Will there be a recession in Australia this year, or won’t there? It’s a question that has been bouncing around boardrooms, break rooms and newsrooms for months, with little in the way of a definitive answer.
Whether a full-blown recession is on the horizon or not, the pressure is on for business leaders to trim remaining fat from their expenses. Rising interest rates are already driving some global organisations to extreme measures.
In early January, Salesforce said it would be cutting about 10 per cent of its workforce, or 8000 employees. Shortly afterwards, Amazon announced more than 18,000 job cuts, the biggest workforce reduction in its history. Many other companies have followed in their footsteps – especially in the technology sector.
These mass cuts by companies that prospered during the pandemic might raise a red flag not only for employers considering their growth prospects this year, but also for a workforce that is fatigued by crisis and in desperate need of job security.
With the added pressure of retaining staff amid skills shortages, HR professionals are once again being asked to do more with less.
Angela Knox, Associate Professor of Work and Organisation at the University of Sydney Business School, says striking the balance between cost optimisation and preservation of the employee experience will require a human-centric approach.
“Although we are facing economic challenges, it is important to remember how reliant we are on our staff, and how critical they were on the front lines dealing with COVID-19,” she says.
“It will be especially important to manage the psychological contracts that employees have with their organisations to ensure that their attitudes and behaviours remain positive. If we breach psychological contracts, employees will disengage, negatively impacting performance and productivity and potentially increasing absenteeism and turnover costs.
“To avoid this, it will be really important for leaders to remain fair, transparent and honest when dealing with their workforce.”
“How can we call ourselves human resources if, when push comes to shove and business pressure gets applied, we turn people back into elements in a spreadsheet?” – Marcus Buckingham, Head of People and Performance Research, ADP Research Institute
Strategic business cuts and investing in HR
While organisations look for places to bring down their expenses in the short term, Knox stresses that leaders must not repeat the poor decisions that resulted in the skills shortage.
“Our domestic workforce hasn’t been provided with the kinds of firm-based learning and development opportunities that existed in decades gone by,” she says.
“Many organisations only became fully aware of this skills shortage once our borders closed [during COVID]. As our borders closed and temporary immigrant workers left Australia, the lack of skills in our domestic workforce became impossible to ignore,” says Knox.
If employers neglect investing in learning and development in difficult times, they could end up “jumping out of the frying pan and into the fire” in the future if crucial skills have not been developed in the internal labour market.
On top of this, periods of economic difficulty highlight just how reliant businesses are on the HR department; HR is critical both in preparation for tough times and in recovery efforts. A strong case for investing in HR during unstable times was made by a 2021 report from ADP Research Institute, which demonstrated a positive correlation between interactions with HR and employee engagement.
The first-of-its-kind study, based on surveys of 32,000 employees globally, found that a single touchpoint with HR made employees twice as likely to value their company and five times as likely to recommend it as a place to work than those with no direct HR contact.
It also found that if an employee finds their company’s HR services valuable, they are 3.7 times more likely to stay with their employer.
According to Marcus Buckingham, Head of People and Performance Research at ADP Research Institute, the most crucial area where HR adds value during a recession is in preservation of the employer brand.
“We felt that the simplest way to measure the effectiveness of the HR function was whether or not it was value-promoting to your talent brand, or value-detracting from your talent brand,” he says.
“We’re going to have companies fighting for fewer and fewer people, and that’s not going to change for a long time. And so if you’re [making cuts], the manner in which you do that will affect your talent brand one way or another.
“It will all come down to whether or not you can attract the best talent after this initial dip. Because we will come bouncing back and we’re going to need people.”
Despite the fact that the economy will eventually bounce back, short-term cost-cutting initiatives will be inevitable for some organisations. HR plays a crucial role in ensuring the strategy is considerate of both the business and employees’ best interests, and clearly communicated to them as such.
Without the support of the broader workforces, cost-optimisation strategies are prone to backfiring if employees feel their job security and satisfaction are compromised.
A recent report by Gartner, based on a survey of over 10,000 employees globally, found that 49 per cent of people weren’t sure if cost-optimisation efforts actually worked, and employees were more likely to leave an organisation that engaged in cost-cutting.
The research also showed both managers and employees agree that employee resistance is the biggest barrier to cost-reduction efforts.
Gartner’s Director of HR Advisory, Neal Woolrich, suggests a strategy called ‘open-source change’ to ensure cost-optimisation efforts do not have an adverse impact on engagement and retention.
“As the name suggests, open-source change is all about involving employees in the change process as early as you can, and as openly and as transparently as you can,” he says.
He suggests putting the employees who will be most impacted by the changes in an active role when it comes to executing the change management process, especially when it comes to re-establishing their goals and how they align with business objectives.
Open-source change also includes being transparent about the decision-making process when it comes to more severe cuts.
“If there is that difficult decision to be made around reducing headcount, make it clear that everyone is subject to the same criteria,” he says. “That is, how important is the role to the future strategy of the business? And how well have people performed in the past?
“Then overall, as an organisation, think about what you can do to make each employee feel more valuable in the role they’re doing as they go forward.”
In order to minimise the cultural and reputational risks of conducting layoffs, says Woolrich, there are a number of measures employers could take to let employees go in the most ethical way possible.
“We need to think about how we can support them through the last weeks and months of their job. The focus should be on what we can do as an organisation to add to the value of this employee in the labour market. Can we give them some short-term projects in the lead up to them being made redundant? Can we help them find their next job? Can we leverage partners in our supply chain, or other organisations we have strategic partnerships with, to find them jobs? Those are some ways to conduct layoffs ethically.”
To protect your talent brand long-term after laying staff off, Buckingham suggests creating an alumni network similar to those offered by schools and universities.
“We feel connected to places that helped us grow,” he says.
“The best companies realise that when somebody leaves their employer, they don’t vanish, they don’t cease being human. And by creating [an alumni association], HR can say, ‘Look, we’ve had an economic downturn, we over-hired, and we’re going to have to cut back on our costs to make sure that our stock maintains its level. But we know you, and we do care about you. And even if we can’t have you right now, we want you back someday.’”
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Lessons from the past
According to Knox, leaders must look to the challenges of the past to inform their approach to the latest wave of financial instability.
“For the last couple of decades, a lot of organisations have shifted strongly toward a shareholder-based model,” she says.
“That’s a very short-term approach, because you might be maximising shareholder benefits, but long-term, you’re not necessarily optimising outcomes or creating the policies and practices that will harness the best capability of your workforce.”
Instead, Knox suggests taking an ‘ecosystem-based’ approach that aims to benefit employees, customers and other stakeholders more broadly, rather than making decisions based purely on what’s best for shareholders. Over the longer term, what’s good for stakeholders is also good for shareholders.
“The organisations that endured COVID and the global financial crisis well were those that worked with their employees to understand their preferences, and explored the options that would allow the organisation to reduce costs and headcount while also meeting the needs of their workforce. In these situations, it’s our frontline employees who are in the best possible position to provide insights about where it’s possible to create efficiencies.”
By consulting with employees about their preferences before initiating a cost-cutting strategy, leaders might escape the need for layoffs, says Knox. There may be inefficient policies, practices or work systems that can be designed more effectively, for example.
Other options to consider include working with staff to develop more efficient arrangements that better suit their needs and preferences, including voluntary redundancies, job-sharing, early or phased retirement or a period of unpaid leave.
“The organisations that endured COVID and the global financial crisis well were those that worked with their employees to understand their preferences.” – Angela Knox, Associate Professor of Work and Organisation, University of Sydney Business School
A moral commitment
Buckingham says investing in HR means taking a step back and reevaluating the way it incorporates technology into its services. The aim of these conversations should be to ensure that HR can use tech to maximise efficiency without jeopardising the psychological contracts between employers and their people.
“We’ve tried to get tech to do a whole bunch of stuff that only humans can do. And the best HR functions will very, very soon realise the distinction,” he says.
“We’ve dehumanised HR over the last 15 years in service of efficiency, because we thought of ourselves as a cost. But you can’t dehumanise HR without destroying its value.”
Buckingham says the two key functions technology should bring to HR’s table are accuracy and availability. The right software can provide an instant and reliable source of knowledge and an efficient way for employees to check and update their details. However, he says, where some HR departments tend to fall down is by using technology as a replacement for genuine human connection.
“Often, when [employees] have any sort of interaction with HR, they are emotionally vulnerable. For example, maybe your mum got sick and you called up HR to get family leave. But if, for whatever reason, your company outsourced that to a call centre or a chatbot, the first question that would be asked is, ‘What’s your employee number?’ This is a human. They don’t need a bot [or a stranger]; they need to talk to a person who knows their name. And that person could hand them off to specialists.
“I’m not saying we should go back to the generalist days of 30 years ago, but if I’m a person who has an HR issue, I need a person who knows me [to help].”
Based on ADP Research Institute’s findings, Buckingham suggests that leaders look at every interaction between employees and HR as a potential value-creator, rather than a transaction that should be removed or streamlined.
“It starts with the moral commitment,” he says. “How can we call ourselves human resources if, when push comes to shove and business pressure gets applied, we turn people back into elements in a spreadsheet?”
Knox, Woolrich and Buckingham agree that, faced with the challenge of balancing short-term cuts with long-term resilience, leaders must implement cost-cutting measures with empathy at their core. By refocusing HR on its key objective – to act in the service of the individual – leaders can ensure that HR does justice to the ‘human’ in its name.
A longer version of this article was first published in the April 2023 edition of HRM Magazine.