Human capital and the crisis | Swinging the axe | The Economist

Human capital and the crisis
Swinging the axe
Jan 29th 2009 DAVOSFrom The Economist print edition
Job-cutting has begun in earnest. But will the axe be wielded wisely?
Illustration by Claudio Munoz
THE headlines screamed that January 26th was “Black Monday” for jobs, after firms such as Caterpillar, Corus, Home Depot, ING, Pfizer and Sprint Nextelannounced cuts of several thousand jobs each, due mostly to the rapidly deteriorating global economy. Alas, the consensus among the corporate bigwigs gatheredthis week at the World Economic Forum in Davos was that this marked only the beginning of the axe-swinging, and that there are blacker days to come.
This proved to be one of the big points of difference between the company bosses and the politicians brainstorming in the mountains. The politicians areprimarily concerned with restoring demand enough to reverse the rising trend in unemployment; for many of the corporate leaders, ensuring the survivalof their firms takes precedence over saving jobs. The difficult decision they face is not whether to cut, but how to do so in a way that strengthens theircompetitive position in the medium term rather than seriously damaging it.
The gloomy mood among bosses in Davos makes the worst-case scenario outlined in a new forecast from the International Labour Organisation (ILO) seem themost plausible of its possible outcomes. This supposes that if every economy in the developed world performs as it did in its worst year for unemploymentsince 1991, and every other economy performs half as badly as in its worst year, then the global jobless rate will rise to 7.1% this year—some 230m people,up from 179m in 2007.
The ILO’s most optimistic prediction is that global unemployment will rise only to 6.1% (from 6% in 2008). But that assumes that the world economy performsas the IMF forecast in November: global GDP growth of 2.2% in 2009, with a slight recession in the developed economies. The IMF has since become much glummer:this week it forecast growth of just 0.5%.
Already, firms are starting to find that their first round of cuts after the onset of the crisis is not enough. Caterpillar’s latest cut of 5,000 jobs isin addition to 15,000 already announced. Such is the frenzy of cutting that Challenger, Gray & Christmas, a recruitment firm that tracks employment trendsin America, sought a crumb of comfort in its finding that over 50% of firms have cut jobs: it proclaimed in its latest report that “nearly half of employersavoid lay-offs.” But it pointed out that things would be even worse without the various innovative schemes adopted by companies to reduce labour costswithout shedding jobs. These include salary cuts, reduced hours and “forced vacations”.
As Challenger suggests, this seems in keeping with the suggestion by Barack Obama in his inauguration speech that people should “cut their hours [rather]than see a friend lose a job.” Already, by way of example, White House staff earning $100,000 or more have had their salaries frozen. Companies includingAvis, Starbucks and Yahoo! have announced pay freezes for 2009.
Yet these creative job-saving schemes are unlikely to go anywhere near as far as Mr Obama would like. They may appeal as a way to buy some time as companiestry to get a clearer picture of where the economy is heading, or to retain talented workers who are likely to be needed in the future, if not now. Butthey have little appeal once a firm has decided that it needs to scale back its operations. As the boss of a big American retailer put it privately atDavos, “We have to decide who we want on the bus and to motivate them as much as possible.” Clever ways to share the pain can demotivate everyone, especiallyif they are seen as merely postponing the inevitable job cuts, making everyone fearful.
Painful choices
Equally candidly, many bosses admit that the crisis is giving them a chance to restructure their firms in ways that they should have done before, but founda hard sell when things were going well. As a rule of thumb, a careful cull of the 10% of lowest performers can make a firm leaner by removing fat withoutdamaging muscle. It is going beyond the 10%, as many firms are now starting to do, that poses the real risks to a firm’s competitiveness.
During the relatively modest downturn at the start of this decade, for example, many professional-services firms cut too deeply, especially in their lowerranks, and found they were poorly positioned when strong growth resumed sooner than expected, says Heidi Gardner of Harvard Business School. Firms builton pyramid structures in which senior managers mentored larger numbers of employees below them suddenly found that, in a growing economy, they lacked thementors needed to manage the army of new recruits. Instead, they had to re-hire ex-staffers at higher salaries and, in some cases, abandon proven policiesof hiring senior managers only from within, says Ms Gardner, who worked for McKinsey at the time.
This crisis is revealing how few firms have really thought through their talent strategies, says Mark Spelman of Accenture. Claims that “our workers areour most valuable assets” are too often platitudes, the emptiness of which is now being revealed. But those firms that have thought seriously about theirtalent needs have the opportunity to get ahead of those that haven’t, says Mr Spelman, not just by shedding poor performers but also hiring scarce talentfrom outside, in what is now a buyer’s market. Other tips from Mr Spelman include avoiding voluntary redundancy programmes, which encourage the most employablepeople to quit, and not firing the newest recruits on a crude “last in, first out” basis, as this cuts off the supply of future talent. Instead, firmsshould identify which workers they need to keep, and do what they must to retain them.
Governments can play a useful role or a harmful one, depending upon their attitude to companies, says David Arkless of Manpower, an employment-servicesfirm. If they focus on working with firms to smooth the movement of labour to where the future work will be, for example by providing skills training andfinancial incentives to workers in transition, then the economic downturn could be less painful than now seems likely. (A quick recovery in lending tosmall businesses, the main drivers of job creation in most countries, would also help.) But if governments try to prevent firms from making the changesto their workforces that they want, the result is likely to be prolonged gloom.
Although Mr Obama’s support for strengthening the ability of unions to enter workplaces is arguably a worrying sign, the American economy is far more accommodatingof flexibility in employment than many European countries. Mr Arkless, for one, says that without a dramatic change of attitudes to job-cutting in Europe,“there is no doubt that American firms will come out of this downturn better than anywhere else in the world, due to their flexible employment model.”This will provide no comfort to anyone facing the prospect of unemployment, but it is a message that politicians would do well to take to heart.