Over the course of my nearly 40-year career in human resources, I have witnessed almost a dozen recruiting booms (where recruiting budgets ballooned) and busts (where there were sharp and painful drops in the need for recruiters and for recruiting).
While the primary factor driving each differed, all were attributable to economic factors. As news stories continue to unfold, it appears as though the U.S. economy and that of many other nations that base their economies on the U.S. dollar are on the brink of a major correction, one that will not be pleasant for many debt-ridden domestic workers.
The reason I bring this topic up today is to stress the importance of the need for understanding how this will directly impact your ability to recruit and retain talent, and how to plan accordingly.
Is the Sky Falling?
The U.S. economy has for decades been prone to large expansions, moderate corrections, and the occasional recession. I think a good number of recruiters with more than 10 years of experience still remember the last recession triggered by the collapse of the expansion of the tech sector in 2001.
The most recent expansion, largely attributed to the banking sector, has been growing at a declining rate in recent quarters and emerging developments may stall the economy altogether, forcing us into a state of contraction.
While a weak dollar has made U.S. goods and services affordable to the rest of world, enabling corporations to book record-breaking profits, the collapse of the sub-prime lending market is drying up both companies’ and consumers’ access to cheap credit. Even companies experiencing rapid growth as I type these words are discussing cost-containment efforts during executive retreats and strategic planning sessions.
Recruiting, as we all know, is tied to the state of the economy, and labor shortage or not, contractions will impact the recruiting function and recruiting leaders need to be “prepared rather than surprised.”
Yes, companies will continue to need talent, and the labor shortage will somewhat protect the recruiting function even if a major contraction occurs, but impacts can manifest themselves in a multitude of ways. For instance, declining home prices in regions that experienced massive appreciation in recent years may open up such regions to top talent that once resisted migrating due to cost-of-living concerns.
Candidates feeling the pinch of more costly credit may place more weight on benefit programs that leverage the employer to isolate them from economic issues such as transportation credits, pre-tax savings programs, and bulk purchasing. The most likely impact is that employees becoming eligible for retirement will opt to stave off their exit, thereby postponing the impact of a change in global workforce demographics.
You can ignore this warning, an act that has become par for the course in HR, but doing so could hurt you in ways you never imagined.
If you are one of the minority that does not mind a heads-up warning, I suggest you begin forecasting and developing an “if, then” plan for a variety of the following economic issues.
The Housing Crisis
It’s hard to pick up a newspaper or watch a television news program that doesn’t contain a new development relating to the housing crisis. Across the nation, borrowers with sub-prime mortgages who couldn’t refinance due to a lack of equity are losing their homes.
Defaults in Las Vegas, for example, are up 200% over last year. In many cities that once experienced massive appreciation, housing market inventory is ballooning and sellers have to offer significant discounts over appraised values to sell their home. While some think we are near the bottom of this issue, banks have yet to write down the value on more than $2 trillion worth of sub-prime mortgage debt. To avoid institutional collapse, banks are raising interest rates and both consumer and commercial loans are getting harder to get.
This issue is impacting recruiting now and will continue to do so in several ways, including:
- Talent located in metropolitan regions that experienced significant appreciation in the value of their homes will be more hesitant to relocate because liquidating their current home at this time would require a significant discount in the selling price.
- Talent located in regions that have experienced conservative appreciation and that currently enjoy a relatively stable housing market may consider this a great time to relocate into regions that were once outside their reach due to the availability of significant housing discounts.
- Stress of financial issues, including foreclosures, a rising cost of maintaining debt, and lack of access to capital may cause an increase in depression among existing workers, decreasing productivity and necessitating an increase in contingent worker utilization if organizations are to meet pre-established deadlines.
- Turnover among employees earning wages at the lower end of the spectrum may increase as housing market pressures force them out of the local market and transportation costs make longer commutes unfeasible.
- With access to cheap capital in the form of home equity loans and equity cash outs drying up, candidates may be more concerned about cash compensation, benefits that impact their economic well-being, and the adequacy of relocation packages.
The Stock Market Correction
One day your company’s stock is up marginally, the next it’s down significantly. One day your retirement looks comfortable, the next a little pinched. The volatility of the current stock market has even some of the most respected analysts flipping coins to predict what the next day will hold.
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With volatility exceeding 10% of market value, many don’t know which way to run. There is a 1:3 chance that despite a rate cut by the fed a recession looms.
How bad is it? So far, it’s not as bad as corrections in 1987, 1990, or 2001, but the story is still developing. In all reality, market prices are most likely adjusting to produce more tolerable P/E ratios, given that earnings for many companies will most likely decline as consumers spend less.
All of this economic speak has considerable impact on recruiting. For instance:
- Companies that are most likely to be impacted by declining earnings may find that stock options, stock grants, and company funded retirement benefits carry less weight with both candidates and already employed top talent.
- Employees nearing retirement may postpone their exit, as recent corrections may have significantly impacted their nest egg.
- Companies with diversified global operations and in industries not affected by consumer spending will become more attractive, enabling them to recruit top talent away from firms more heavily impacted.
- Capital expansion plans may be postponed or canceled as access to cheap capital dries up.
- Mergers and acquisitions may slow down, as the cost of using equity to complete such transactions exceeds the economies of scale such a transaction would produce.
The Credit Crunch
The ability of large organizations to get financing for capital projects and market expansion has been relatively “easy” for the last few years. It was this fact that enabled many private equity firms to go on a spending spree.
However, business financing like consumer financing is becoming much more difficult to get. Bloomberg has reported a 93% drop in the availability of certain types of institutional debt. Upon the close of the sale of Chrysler to Cerberus, bankers found they couldn’t sell off nearly $10 billion in loans.
This tightening of the credit market will impact recruiting by:
- Decreasing the volume of mergers and acquisitions once funded with borrowed money. The cutting of M&A activity will increase the number the number of companies that have to pursue alternate exit strategies, such as the less-common ceasing of operations. This will free up talent employed by organizations incapable of competing in a global market.
- Slowing capital expansion plans. This may reduce forecasted headcount growth, or shift it to a different region.
- Decreasing local investment while increasing foreign investments where markets are expanding. There are no doubts that despite this local economic blip, markets in Asia are expanding. Look for more companies to ramp up operations in Asia. Expat assignment anyone?
Your estimate of the likelihood of these “negative” economic events might vary significantly from mine, but the key lesson to be learned here is that these types of events will happen. The only question is when.
Whether you are optimistic or pessimistic, plan to handle every reasonable eventuality in recruiting. In order to be better prepared, take these steps:
- Read the paper. Now is the time to read more about economic factors and to look at both the positive and negative forecasts that are made by leading investment banks and economists.
- Revisit the past. Determine whether there are any “precursors” or predictors of these negative events. Look for past trends, timelines, and what worked or didn’t work.
- Work with your company’s forecasters. If you work in a medium- or large-size organization, you probably already have forecasters in your strategic business-planning unit. Rather than trying to do forecasting on your own, work with these professionals and piggyback on their forecasts.
- Develop “if, then” scenarios. The most effective but simple way that I have found to prepare for ups and downs is to have an “if, then” plan for each possible problem and opportunity. This encourages you to practice, in advance, what you will do “if” a positive or negative thing occurs. Generally, the first step in “if, then” planning is identifying the most likely future events. Then attempt to identify early-warning signs that precede these events. Finally, you require the manager to prepare an outline of the action steps that you would likely take if this event actually occurs. The best plans have variations depending on the severity of the event.
- Assume the worst. I don’t know why, but in my experience, most people in HR are eternal optimists. Avoid this common pitfall by having a “worst-case scenario” plan to handle any potential disasters. In addition, be extremely careful of any plan or anyone who tells you that the current recruiting boom will continue on indefinitely, with no indication for downturn. It turns out that almost everyone in HR or recruiting are prepared for good times; it’s the bad times that almost universally seem to surprise them.
- Recruit locally. Until the economic turmoil in the housing market subsides, focus your recruiting efforts on individuals who don’t have to buy or sell a house in order to take your job.
Now let me be clear. I’m not predicting that an economic downturn will occur tomorrow, but I am saying that if you look at the history of recruiting, downturns turn out to be relatively frequent occurrences.
You can choose the myopic view and continue to look “only at recruiting” and to ignore economic bad news, but if you expect to be in this business over the long term as I do, now is the time to pay attention and to do some scenario planning so that you will never be “surprised” again.