HR Got Caught With Its Pants Down…Once Again!

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:

Article Continues Below
  • 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

Join Dr. John Sullivan on Tuesday, March 17, 2009, at 1pm ET for an interactive discussion on Aberdeen’s latest research report, entitled Contract Labor Management: Superior Workforce Strategies for a Demanding Market. This informative webcast will dive into the characteristics of innovative contingent workforce management solutions developed by best-in-class organizations in response to global business practice and economic pressures. It will feature examples of emerging best practices and discuss how staffing industry technology and service providers are working to support them and expand talent management capabilities. John will be joined by Ginny Gomez, SVP, Product Management & Marketing, Peopleclick, Inc., and Jay Lash, Executive Director, Human Capital Solutions & Product Development, Allegis Group Services, Inc. To learn more and register for the event, please click here.

Dr. John Sullivan, professor, author, corporate speaker, and advisor, is an internationally known HR thought-leader from the Silicon Valley who specializes in providing bold and high-business-impact talent management solutions.

He’s a prolific author with over 900 articles and 10 books covering all areas of talent management. He has written over a dozen white papers, conducted over 50 webinars, dozens of workshops, and he has been featured in over 35 videos. He is an engaging corporate speaker who has excited audiences at over 300 corporations/ organizations in 30 countries on all six continents. His ideas have appeared in every major business source including the Wall Street Journal, Fortune, BusinessWeek, Fast Company, CFO, Inc., NY Times, SmartMoney, USA Today, HBR, and the Financial Times. In addition, he writes for the WSJ Experts column. He has been interviewed on CNN and the CBS and ABC nightly news, NPR, as well many local TV and radio outlets. Fast Company called him the "Michael Jordan of Hiring," Staffing.org called him “the father of HR metrics,” and SHRM called him “One of the industry's most respected strategists." He was selected among HR’s “Top 10 Leading Thinkers” and he was ranked No. 8 among the top 25 online influencers in talent management. He served as the Chief Talent Officer of Agilent Technologies, the HP spinoff with 43,000 employees, and he was the CEO of the Business Development Center, a minority business consulting firm in Bakersfield, California. He is currently a Professor of Management at San Francisco State (1982 – present). His articles can be found all over the Internet and on his popular website www.drjohnsullivan.com and on staging.ere.net. He lives in Pacifica, California.

 

Topics

17 Comments on “HR Got Caught With Its Pants Down…Once Again!

  1. Hey John,

    Lots of good points here in your article and I do agree with many of your suggestions. Though I have never worked as an HR Manager or Director, I do speak with them on a regular basis, and what you have FAILED to recognize is that it is very easy for a manager to prepare for a slow down in production; and it is easy for a retail manager to reduce inventory. But those actions are FAR different than dealing with people’s lives and well being. Even if HR does implement some of your strategies they are inevitably going to have to let people go in economic down turns. People’s jobs and income are at stake, so what is wrong with cutting hours, awarding buyouts, or offering furloughs to soften the blow and to give everyone a fighting chance? Also your example of Amusement Parks & Ice Cream Parlors I do not see as a valid point. In those cases you are dealing with seasonal workers, who know they are working seasonally, and many, if not most of which are teenagers and college students without mortgages and families to support.
    Again, I agree with your suggestions, but failing to mention what it is HR REALLY has to deal with during these tough times is unfair. I recently blogged about this topic on our blog at http://www.CivilEngineeringCentral.com . The title is “Human Resources-Unsung Heroes” and readers can check it out at http://civilengineeringcentral.wordpress.com/2009/02/11/human-resources-heroes/ .

    Best,

    Matt Barcus
    http://www.CivilEngineeringCentral.com
    building teams . engineering careers

  2. I found this article to be an excellent one! I have been a HR Manager and I found all of the writers examples relevant. HR can implement most, if not all, of these strategies in focusing on an area that costs the most money and yet is the most generalized. **Performance Reviews**.

    The previous reviewer mentioned that “we are dealing with people’s lives” well that is true. We are in such a litigous mind set that no one including department heads wants to call out mediocre or sub -par performers for fear of being sued. If these individuals (sub-par or out dated skills) were given clear and direct benchmarks and follow through on goals and objectives, the end result would be that everyone knows where they stand and understands their role. If an individual sees that their skills are outdated then they decide to update or change jobs. If the department managers have good forecasting plans in place they can decide which individuals are head of the game give them tangible direction and develop or weed out the “weakest links”.

    Everyone is just trying to stay below the radar to get from “paycheck to paycheck”. HR including unfortunately. The term “movers and shakers” doesn’t exist. No one wants to rock the boat in up times and everyone wants to hold on during the down tiimes.

  3. I agree with John’s premise that lack of workforce planning is a missed HR opportunity. However I would like to point out that with the current level of business decline for many companies even effective workforce plans would be operating under or approaching the “worst-case-scenario” phase. Effective plans may have softened some of the impact for employees, but it most likely would not have been much of a comforting buffer.

    The real downside to not having an effective workforce plan is that right now the most common reactions and plans put in place aren’t a real roadmap through the messy unknown and unpredictable. And undoubtedly for those companies that don’t have good plans in place, right now the leaders and HR minds are just trying to manage the crisis and not focused on developing plans. Unfortunately those without plans are going to have to land this plane with whatever tools they can. It’ll be messy, but the plane has to land. I can assure you just as a pilot or crewmember wouldn’t be thinking about reviewing maintenance logs when a plane needs to land due to engine failure, business leaders and HR probably aren’t trying to come up with detailed plans at this time.

    Something can be done right now though, and that means developing and implementing a “worst-case-scenario” component of the organization’s workforce plan and linking it to the Talent Management and Business Succession processes.

    I’m not much into the “seat at the table” discussions, but I certainly think performing now, under pressure, in a real business crisis, is going to be the best chance for HR to show it’s leadership and value to an organization. So if the best and chosen path through this turmoil is through downsizing, layoffs, furloughs, and the like; then HR just needs to show how these steps are a part of business viability and not simply reactions to circumstances.

    My real concern is for those in HR roles who don’t seek outside help if they really need it.

  4. Great post John! I find your rant to be very well placed.

    In talking with leaders in Workforce Analytics and Workforce Planning I found that the RIFs that were done at some companies represented an utter lack of basic understanding of Human Capital…and in some cases, the insights of respected practitioners were left out of the decision making. Was it a SHRM study that found only 35% of HR leaders were involved in the reduction decisions?

    REAL LIFE EXAMPLE: What kind of workforce do you get when you offer everyone a severance package? Call it the ‘opt out’ strategy. ANSWER: Highly valuable (tenure, knowledge, performance) staff will leave for greener pastures AND lower performing will leave before the axe comes down — both will be handed a bag of money as they leave. This is a recipe for mediocrity.

    WORST CASE SCENARIO: An organization has no WFP in place, and no agreed-upon framework for critical roles — when time comes to reduce staff, they cut (or incentivize the departure of) people from critical roles even as they expect them to be in greater demand in the next 1, 3, and 5 years.

    So, not being strategic with WFP and analytics has a cost, and it is execerbated in these times….pants down, indeed.

    Nicholas Garbis, Sr. Consultant with Infohrm
    http://www.Infohrm.com
    Infohrm – the global leader in Workforce Planning, Analytics, and Reporting for over 25 years.

  5. I’m interested in learning more about Slide’s SWAP approach. If anyone has any insight or contact information to share, I’d greatly appreciate it.

  6. Interesting article. I agree with all of the methodology listed in the latter portion. Excellent information. Too bad the beginning of the article was so antagonistic that it probably alienated a lot of the HR folks reading it before it got that far.

    John, I also think you’re making a very drastic generalization about HR. Most HR departments would love to have the time and resources to do in-depth workforce planning. What you fail to state is that HR is usually one of the last groups to get resources, the first group to get cut, and are many times forced into being strictly transactional and reactive.

    The current economic downturn is not cyclical. It’s a nose-dive that most companies could not have planned for. The cuts go beyond normal cycles and are eating into companys’ core workforce – the folks that you don’t plan to let go.

    HR is not the only group “at the table”. Workforce planning is the responsibility of the entire organization. HR should definitely be developing the structure, but it takes everyone to make it work. The current state of affairs should not be laid entirely on HR’s doorstep.

  7. I completely agree that workforce planning is an essential function of HR and what can be learned from the current economic crisis is that there is now a “benchmark” for what truly is a worst-case scenario. As a previous writer stated, the examples cited cannot be applied to companies, as they are examples of “seasonal work” and clearly are not applicable to all corporations–especially multi-national corporations. Additionally, I have to take issue with the statement that HR reacts “emotionally rather than logically” when pushed by CFO’s to reduce costs. My 20 year career has ranged from start-up to multi-national corporations and I–as well as HR people I have worked with–are individual who do not want to “hear” about layoffs or who are “emotional and not logical”. This is unfortunately a prejudice that still exists, and often used to take” pot-shots”–and I am disappointed to see it in this article.

    While I agree with some of the comments made in this article, it is irresponsible to classify the current economic situation as just another downtown. Previous “downturns” have not even come close to what is now occurring. This is not “just a downturn”, this is an economic crisis and to put this current economic situation in the same category as previous downturns is really oversimplifying the situation. Bank bailouts, auto industry bailouts, this is not something that has been seen in my career (and I doubt anyone else) have even experienced. There have been previous articles regarding HR’s lack of workforce planning, but what seems to be missing in those articles–as well as this one, is that with the current economic situation even having a “worst case” scenario workforce plan in place, would not have prepared companies for the current situation.

    Merlynn Bertini

  8. Great post John! Your rant is very well placed. In talking with leaders in Workforce Analytics and Workforce Planning I found that the RIFs that were done at some companies represented an utter lack of basic understanding of Human Capital…and in some cases, the insights of respected practitioners were left out of the decision making. Was it a SHRM study that found only 35% of HR leaders were involved in the reduction decisions?

    REAL LIFE EXAMPLE: What kind of workforce do you get when you offer everyone a severance package? Call it the ‘opt out’ strategy. ANSWER: Highly valuable (tenure, knowledge, performance) staff will leave for greener pastures AND lower performing will leave before the axe comes down — both will be handed a bag of money as they leave. This is a recipe for mediocrity.

    WORST CASE SCENARIO: An organization has no WFP in place, and no agreed-upon framework for critical roles — when time comes to reduce staff, they cut (or incentivize the departure of) people from critical roles even as they expect them to be in greater demand in the next 1, 3, and 5 years.

    So, not being strategic with WFP and analytics has a cost, and it is exacerbated in these times….pants down, indeed.

    Nicholas Garbis, Sr. Consultant with Infohrm
    http://www.infohrm.com
    Infohrm – the global leader in Workforce Planning, Analytics, and Reporting for over 25 years.

  9. I’ve always appreciated Dr. John’s constructive criticism of HR. I agree with the previous posts, however Dr. Sullivan alienated some readers. There were some good points and ideas, however the article left me wondering if Dr. Sullivan is still in touch with the private sector. Sometimes when people cross into higher education, they lose relevance. I hope that is not the case as I have been a fan of Dr. Sullivan for quite some time, and appreciate him giving HR slaps as needed. This one seems out of touch.

  10. So the good professor, whom I assume can no longer be fired, calls HR people a bunch of idiots and has conjured a SWAP process which coldly swaps the obsolete each quarter ignoring the hundreds of hard-to-measure variables that exist in any group of human beings.

    I’ll bet his family can’t WAIT for him to come home each night.

  11. Valid points and an excellent attempt to bring the topic of Workforce Planning into focus. However, I share the concern of many regarding the sweeping stereotypical statements regarding HR departments. Perhaps a more constructive approach would be more appropriate.

  12. So, Nicholas, if only 35% of HR leaders were involved in reduction decisions, how can the results of those decisions be put on HR’s shoulders?

    Nice pitch for your own services, though.

  13. I think I was a little slow on the uptake. I get it now. Did I mention I’m an HR consultant? Here’s my advice:
    1. Save a boatload of money by alienating your workforce.
    2. Give that money to me.
    I’m open for bids.

Leave a Comment

Your email address will not be published. Required fields are marked *