HR Got Caught With Its Pants Down…Once Again!

Mar 9, 2009

Let me apologize upfront for this “rant” on HR’s failure regarding workforce planning, but I can’t think of another time where human resources as a profession appeared to be floundering to the point where it’s embarrassing itself.

All you have to do is read the paper on a regular basis to see that many firms and their respective HR departments are struggling to find ways to reduce labor costs. Rather than implementing sound and well-established workforce-reduction plans, HR and talent managers appear to be making it up as they go, all in an attempt to avoid layoffs.

More often than not, they are utilizing ineffective and often damaging approaches like furloughs, pay cuts, and voluntary buyouts. After years of clamoring to get a seat at the table, many HR departments are demonstrating why they shouldn’t have a seat; they struggle to deal with a predictable and reoccurring problem, economic downturns, and the related need to dramatically cut labor costs.

At least to me, the lack of a long-established plan of action at most firms is an unnecessary embarrassment when it should be a significant opportunity to stand and deliver.

Déjà vu All Over Again

The lame reaction by HR departments around the world wouldn’t be nearly as embarrassing if it weren’t for the cyclical nature of the economy and the fact that organizations have faced downturns every few years since the emergence of civilization, most recently in 2001 and 1994.


Organizations are challenged to grow quickly during upswings and reduce labor costs during downswings, yet most in HR seem utterly “shocked” at the challenge before them. This time around, unfortunately, organizations are proving that despite lots of practice, they are no better equipped to handle the problem than they were the last time it occurred.

It’s almost like those in HR feel exempt from learning from history. Shame on those in HR who are so busy with day-to-day activities they can’t learn lessons from their mistakes. Even a struggling sophomore in economics knows that the economy is cyclical and that ignoring or pretending that it simply isn’t so is a prescription for disaster.

When business is good, senior executives expect HR professionals to be ready with a plan to hire and develop more people so that the organization is capable of meeting its growing obligations. When revenues decline, executives expect HR to have a plan to painlessly cut labor costs, again to right-size the organization to its obligations.

Executives expect all business functions to be able to adjust their expenditures with the changing business cycle. Can you imagine a store manager at Macy’s not realizing that there is an established retail holiday cycle where employees are added for the busy season but then “released” when consumer demand subsides? Ignorance of this business cycle would get any retail manager fired on the spot.

Similar cycles occur at ski resorts, amusement parks, and ice cream parlors. In fact, this “hire and then release” cycle occurs in every industry, the only difference is that instead of the down cycle occurring at the same time each year, it instead occurs in five-, seven-, or 10-year intervals. Just because they don’t occur at the exact same time every year is not an acceptable excuse for being unprepared.

Don’t You Dare Use the ‘L’ Word (Layoffs)

It seems to me that only Pollyannas or naïve individuals should be “caught with their pants down” without a plan for how to lower labor costs as business revenues decline, but isn’t that exactly the problem with many HR functions? 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.

Other managers throughout the business routinely face up to the fact that they must periodically reduce costs. Managers of product inventory know it, production managers know it, even call center and shipping managers know it.

Because the total cost of employees is often 60% of all variable costs within an organization, 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.

It seems like some HR departments try things almost at random (like hiring freezes, voluntary buyouts, and employee furloughs), 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 by the CFO’s office to reduce labor 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 labor costs without negatively impacting productivity.

HR needs to stop developing an “ad hoc” cost-reduction program every seven years, only to immediately abandon it after its first use; instead, a permanent process that provides for the real-time adjustment of labor costs and overall staffing levels is needed.

There are only three effective solutions that enable rapid labor cost containment:

  • A fixed contingent workforce percentage program. Where workforce headcount growth and labor cost reductions are both handled through the use of a fixed percentage of labor cost being allocated to contingent labor. 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 labor costs (Google and Microsoft are benchmark firms).
  • A continuous reduction plan. Under this approach, surplus labor (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).

All of these approaches provide an organization with the capability to adjust the capability of the organization while containing labor costs.

The Four-Petal Shamrock Workforce Management Strategy

The most effective workforce management strategy is known as the shamrock approach where a portion or group of the workforce is represented by one of four petals:

  • The first petal (permanent employees with good performance and current skills) reflects jobs and individuals who would not usually be reduced in a normal downturn.
  • A second petal represents a group of contingent workers who could be easily released when labor costs need to be cut.
  • The third petal represents work that would be outsourced under flexible cost contracts.
  • The last petal would reflect the SWAP program and individuals who would be replaced whenever a high-potential recruit came along.

HR Should Identify Warning Signs

There is a relatively simple, two-part process that allows HR to identify precursors or warning signs that would alert HR leaders before they need to reduce labor costs:

  1. Identify first-action firms. In every industry, there are repeatable historical patterns where certain firms act first to either reduce labor costs or to increase hiring. Here is an example to illustrate the approach. If you look back to 2001 and 1994, you might find that computer-chip equipment manufacturer that we will call Firm X was a “first action” firm. Meaning that they began to reduce labor costs months before their competitor, Firm Y. Several months later, you, their customer (Firm Z), followed suit by cutting labor costs. If Firm X acted immediately after their orders decreased by 20%, your company, Firm Z, can now use that pattern of first- and second-acting firms as well as the precursor (20% cut in orders) as early warning signs about when your firm might need to act to reduce labor costs. Changes in key economic indicators like unemployment rates, interest rates, or consumer spending rates might also serve as precursors or warning signs.
  2. Identify the ideal labor cost to revenue ratio. If, for every $60,000 in labor costs, there should be $100,000 in revenue (a 6-to-10 ratio), you know that when the ratio reaches 8 to 10, it’s time to reduce your labor costs. In the opposite direction, when the ratio reaches 4 to 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 labor.

Other Action Steps

Pre-identify jobs that are likely to be protected, even during slow growth periods. By working with managers, you can 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.

Conversely, there are jobs that are almost always reduced or 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.

One last but very important action step is to make labor cost-reduction decisions more “fact-based” and metric-driven. Whenever any labor cost-reduction program like furloughs or voluntary buyouts are administered, use metrics to assess how effective they really were in cutting overall labor 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.

Final Thoughts

If you are an HR leader and take umbrage to this article and its characterization of HR as a group that fails to learn from history, we will just have to agree to disagree.

Any organization that tries short-term “stopgap” measures only to be forced months later to conduct large-scale public layoffs has to be classified as a workforce planning failure. A superior and more strategic approach is a permanent workforce strategy that allows you to continually “vent” or seamlessly reduce workforce costs. Contingent workforce, continuous reduction, and SWAP plans all produce less workforce disruption, gossip, bad publicity, and surprises.

It’s time to face reality. In a volatile world, the ability to expand the workforce and then later to contract it is fast becoming a required capability for all firms. In the near future, it will likely be necessary for HR to have the capability of hiring new skills and talent in some areas, while simultaneously releasing workers in low-priority areas. The ability to handle this “continuous churn” will become a key competitive advantage for firms and a primary differentiator between good and great HR departments.

Free Webcast on Contract Labor Management

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