Some economists say there is a 20-25 per cent chance a recession will hit Australia in the next 12 months. How should the HR industry adapt in an environment that most practitioners have never even experienced?
During what has become known in Ireland as the ‘Great Recession’, the nation’s financial system almost collapsed. It was the economic equivalent of a violent car crash. In 2008 the country suddenly went from being the success story of Europe, with full employment, and GDP growth touching 10 per cent, to a situation far worse than anybody could have imagined.
“It was Armageddon,” recalls Bill Roche, full professor of industrial relations and human resources in the Smurfit School of Business at University College Dublin. “In 2008 and 2009, Irish GDP contracted by 10 per cent, which is phenomenal. Unemployment climbed sharply, reaching a peak in 2012 of 14.6 per cent.”
The government took equity in the nation’s major retail banks, says Roche, author of the book Human Resources in the Recession: Managing and Representing People at Work in Ireland. Ireland then had to resort to a financial assistance program from the ‘troika’ of the International Monetary Fund, European Central Bank (ECB) and the European Commission. In November 2010, the nation was forced, under the ECB’s threat of withdrawal of further liquidity, to accept a rescue package that involved borrowing €85 billion. It was a massive debt for a small economy.
“It was easily the worst peacetime economic crisis in the history of the independent Irish state, stretching back to 1922,” says Roche. “It drove a major shift in HR practices and also in the HR function.”
As Australia heads into what some economists say will be our first recession in three decades, it pays to look to other markets for lessons around the challenges faced, and solutions developed, by HR professionals. While the Irish experience was one the nation would rather not repeat, the HR industry came out of it in arguably better shape than it was in during the good times.
“HR became significantly more influential,” says Roche. “There were fewer HR staff, and they had fewer resources to make use of external consultants. They were forced to reduce the cost of HR policies and processes, including restructuring the function so it became leaner.
“But the reason HR became more influential at the same time was straightforward. Suddenly HR skills and expertise – for example, how to implement a three-day working week, how to lawfully introduce a layoff programme, etc – became critical to the survival of businesses.”
During the boom times, HR had been all about delivering services, recruiting people, retaining workforces, etc. But when things turned dark and generalised retrenchment programs had to be implemented without upsetting trade unions in firms where they were recognised, HR was central to the success of those programs.
Communications had to be managed carefully as workers across private and public sectors agreed to pay freezes or cuts in order to hold on to their jobs. Roche suffered three pay-cuts during the period.
“Companies tried continuously to engage in sophisticated forms of communication,” he says. “They would communicate as best they could with staff why they were doing what they had to do. As they were explaining, it was often quite literally a matter of survival.
“A lot of the HR people didn’t themselves deliver the message to their workforces because they quite wisely thought the people would say that HR always says this stuff. They instead mobilised chief executives and very senior managers to front the communication. It was often the first time that HR directors became business partners in a real sense.”
Grace under fire
Communication during good times in business is nice to have, but during a downturn it is absolutely vital to get it right, says Wayne Cascio, a Distinguished Professor at the University of Colorado, and the Robert H. Reynolds Chair in Global Leadership at its Denver campus.
People are more concerned than ever about losing their jobs during these times, so engagement, or at least a sense that we’re all in this together, can only be created by consistent communication from leadership teams.
“It’s essential to have good communication from the top, with the leaders willing to be transparent and having a strong game plan,” says Cascio. “That’s the way they give people hope. Leaders must be very transparent about their plans, so everybody understands there aren’t going to be any surprises.”
Downsizing, says Cascio, should be considered only as a last resort in anything but the direst of economic circumstances. Businesses that performed well during the recent US recession, he says, were those that saw their people as part of the solution rather than part of the problem.
The CEO of DuPont, for example, required every manager to meet with his or her direct reports and come up with at least three suggestions for cost-saving. These ideas were then further developed and finessed by a screening committee.
“They needed about US$35 million in cost savings to avoid any layoffs, and they wound up generating about US$60 million in cost savings because they saw their people as part of the solution,” says Cascio. “Any company could do that, but it takes leadership and communication from the top.”
Another case-study business, Lincoln Electric, makes arc welding equipment.
“It’s pretty unglamorous work,” he says. “But the company has never had a layoff since the 1930s. One thing it did during the recession was create what it called ‘Leopard teams’. Members of these teams had to change their spots, to get off the factory floor and go out and find opportunities in the marketplace.
“One team identified a market for home welding equipment, and nobody was tapping into it. So they started working with big-box retailers and ultimately generated a US$800 million per year line of business.”
A third example is Southwest Airlines, which put a freeze on hiring during the recession. This left their 80-strong team of recruiters wondering how soon they’d end up on the streets.
However, instead of downsizing, the airline introduced a corporate redeployment program. Recruiters naturally boasted excellent interpersonal skills, so they were retrained into customer service roles. As the economy recovered, they were gradually brought back into their previous roles, with a renewed sense of loyalty to the business.
“The best thing a company can do during a downturn is to practise something called environmental scanning. It works around the acronym PESTLE because it involves identifying trends in the political, economic, social, technical, legal and environmental arenas.
“The key to success is to identify trends that are likely to affect your business and where opportunity or threat can reveal itself. Some companies set up small groups of staff to be responsible for each area, but why not establish broader networks during a downturn, bringing all staff on board to help solve problems? HR can take the lead in this.”
Of course, no matter what a business does, the last resort of downsizing can always become a reality. This was the case for most businesses in Ireland when the economic situation went from bad to much, much worse. But even then, as long as leaders have communicated well and done all they can to avoid layoffs, staff will feel gratified that the company at least made an effort, says Casio.
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During a downturn, a different type of leadership is required at all levels of business, says Tina Shah Paikeday, leader of Russell Reynolds Associates Global D&I Consulting Services. Leaders need to be agile enough to navigate difficult and constantly changing circumstances by shifting strategy.
At the same time, HR officers need to have tough conversations with their business leaders around talent within the workforce, and about ensuring great resilience.
“That’s going to be the skill set that will enable you to weather the storm during the downturn. What you want to look for are leaders who are able to change from being pragmatic to disruptive, depending on the circumstances, in terms of their strategic approach,” says Shah Paikeday.
“As we anticipate the economic downturn, we’re going to see hiring slow down. So in that case, identifying the people who do have that agility is something I’d recommend. In addition to that, as we think about talent in the downturn, the emphasis from leadership advisory firms like ours will be on development.”
Most important, she says, is identifying those in the organisation at all levels who already have agile leadership skills. Next up is to develop those people and others. If a large gap is identified, if the organisation does not have enough agile and resilient people available in the current workforce, now is the time to hire for those traits.
What about diversity and inclusion? Is that put on hold when times are tough? Actually, that’s when it becomes even more important, says Shah Paikeday.
“The perspective on this is that organisations able to harness the power of diversity are able to get to higher levels of innovation, which is important when you’re trying to navigate highly ambiguous situations,” she says.
“You have novel problems to solve in a recession, and the research shows that when you have those diverse perspectives at the table… you’re better able to navigate the circumstances in the same way that I was talking about leadership agility.”
Cascio agrees. If a company is serious about diversity and inclusion at any time, he says, then the best time to demonstrate that is when diversity and inclusion matter most – during the hard times. It says something about culture, and culture backed up by communication is what’s most important during a downturn.
The reality of a recession is that budgets are cut across the board. Training and development is often brought in-house and recruitment slows or stops. Technology may be utilised to increase efficiencies in HR and other functions. But Cascio points out that new technology has the best chance of being implemented successfully if it is a cost-saving suggestion by those closest to the action, rather than a staff-cutting strategy by management.
“People like the idea of a shared fate,” says Cascio. “They’re most comfortable when it’s clear that we’re all in this thing together. You’ve got to demonstrate that with your actions.”
The Irish, having been poster children for high-performing economies, are now held up as a great example of effective management during a deep recession. While trade union cooperation with retrenchment measures was important, much of Ireland’s success in surviving the period, Roche surmises, comes down to the extraordinary dominance of multinationals in the Irish economy, which buffered the nation.
But kudos must also go to the HR industry, whose practitioners stepped up and managed relationships with workforces, leaders, unions and the government, and whose roles are still elevated as a result. Sadly, they look likely to be called into action again as the roller-coaster ride seems set to continue.
Roche says, “We’re now back into boom time, extraordinary growth and full employment. We’re back to the strongest GDP growth in the European Union. But there are dark clouds on the horizon. Britain’s decision to leave the European Union, if they ever do, involves major exposure for Ireland. So the HR skills learned during the recessionary period might have to come in to play once again.”
Whether Australia suffers a similar fate or not, it will pay for organisations, via their HR professionals, to ensure they are as prepared as they can be.
This article was originally published in the December/January 2020 edition of HRM magazine.