Managing in a Downturn :Mistakes CEOs make - Headcount Part 2

There's one more point which I forgot to mention in my earlier post regarding cost cutting through headcount reduction.

And that is, quite simply, that a downturn is actually a good time to hire. While I have earlier discussed the rationale for careful, calculated headcount reduction based on skills and performance, there is also a very strong case for careful, calculated hiring based on long term needs, skill gaps within the organisation and growth strategy.

Let's not forget that most companies recklessly cut headcount without the kind of skill/talent based analysis I've advocated earlier. This results in a sudden availability of talent, which may help resolve two problems of talent acquisition in the good times:

a) the sheer unavailability of suitable and good talent due to competition between employers for the best and the brightest

b) even if suitable talent is available, it may be costly; the dynamics of supply and demand in a growth situation leads to salary increases which may not be affordable in the short or long term

However, in a downturn, good talent is suddenly affordable, especially if the recruitment is carefully tailored to strategy. This kind of hiring is also good because it shows a new hire a solid growth path within the organisation, which can lead to high retention levels if the organisation is careful. More on that later.

Therefore, it is imperative that cost reduction is done carefully; you dont want your best talent working for your competition simply because they've been more careful than you about how to reduce headcount!

Managing in a downturn: Mistakes CEOs make- Headcount

Lets start with one of the most common actions taken by CEOs when faced with a downturn or with unfavourable market conditions or with a need to simply cut costs: slashing headcount.

It is probably one of the easiest measures to take, with a considerable impact on the bottomline (apart from slashing marketing budgets, which I will dwell on shortly). Alas, it is also a step that can have far reaching consequences, if not managed properly.

Let me explain what I mean. There are two methodologies that can be used to reduce headcount. The first is by examining processes and functions to determine which ones have excess headcount, thereby identifying redundancies which can be eliminated. So far, so good.

The danger arises when the decision to eliminate jobs is taken on the basis of numbers rather than talent or skills. If a certain function is determined to be redundant, the easy decision is to remove that function or a position/s within the function, thereby eliminating one or several jobs. The impact on the bottomline is immediate, significant and measurable.

But the gain may be short term. What if some of the best and brightest talent of the the organisation is lost in this process? Diehard supporters of this method of headcount reduction will argue that if the function is not required, neither is the talent.

Quite true. But that is true only in the short term. The mid term and long term are more difficult to predict both, from a business environment as well as from a resource requirement point of view. By getting rid of talent in the short term, is it not possible that the organisation ends up compromising its opportunities in the long term, when that talent may actually help in boosting the bottomline?

This kind of short term thinking with a disregard for consequences that are seen to have a minimal probability of occurring is one of the key reasons for the financial crisis that has dragged down global economic growth over the last few months. And it is this thinking that can put brakes on an organisation's growth as well.

Let's not forget; "talent" is an anagram of "latent". Not all talent shines all the time. Talent and skills are need and opportunity based. They need to be employed when the time is right for best results.

So, what is the option?

The second method of reducing headcount. Not by numbers, but by talent management and assessment. It is relatively easy, given the tools available to HR managers today, to identify talent that needs to be retained, as well as tag employees whose contribution to the organisation is either sub optimal or minimal. Organisations need to have in place processes that continually identify, tabulate and rank employees on the basis of their positive contributions. If this process is followed meticulously and consistently, then, when the organisation needs to reduce headcount, it has a ready reckoner which enables it to quickly identify employees at the bottom of the barrel. By making these employees redundant, it is obvious that the performance of the organisation will not be affected either way; however, their elimination will have a significant impact on the bottomline.

And, it will ensure that the right talent is retained for the long term, to exploit the relevant opportunities for growth, as and when they arise. More on talent management and retention in a later blog.