CEOs have no way of knowing length of the downturn, its impact on revenues and clients. As employees can account for up to two-thirds of business costs, they are an obvious target to get costs down fast. Given the quarterly pressures on listed firms, many CEOs turn to reducing headcount as a first fix.
Bearing in mind that the average cost of severance is ten months' salary, plus costs such as the loss of intellectual property, the impact on morale and, later on, the high cost of recruitment, is firing people a sound economic strategy‾
There are many examples of firms that simply cut every department by an arbitrary percentage. Unfortunately, many of those teams were already running lean and subsequently unable to carry out critical projects.
Alternatives
Many organisations are taking more imaginative, alternative measures such as:
"¢ a four-day weeks (state governments such as Nova Scotia and enterprises such as Cisco);
"¢ cancelling bonuses, especially at senior levels;
"¢ cutting insurance benefits and pensions, either across the board or at management levels (Nissan, HP & Motorola);
"¢ unpaid holidays (Dell);
"¢ enforced leave;
"¢ staff "Ëœdefer earnings' with a promise of loyalty bonuses' on top of full payment when times improve.
These employers are cutting employment costs and deferring some operating expenses, while are hanging onto their core assets - people and their knowledge.
Longer-term thinking
The service industry accounts for a third or more of GDP in economies such as Australia, the US and the UK, where organisations are dependent on knowledge workers. In this situation, cost-management strategies need to aware of the longer term impact of "Ëœknee-jerk' reactions.
Management needs to lead by setting a positive example (such as at Nissan and HP) rather than revealing a fear-induced paucity of vision and confidence. They need to share information about the realities of market conditions with employees and other key stakeholders and to seek dialogue around possible ways forward - lack of communication will kill the viability of alternatives.
Expect governmental input too, as discussions considering temporarily relaxing employment laws to enable more flexible approaches such as voluntary cuts in remuneration are already underway.
However, if headcount cuts are unavoidable, an accurate assessment of the strength of teams and what resources they need to fulfil their roles should always be the starting point. Randomly slashing at headcount will not deliver benefits to the business. Indeed visionary leaders are putting much greater effort into staff retention.
Jens Butler, analyst at Ovum