Manage The Downturn With Sound Human Capital Strategy

As the equity markets gyrate, and financial services, manufacturing and housing industries contract, high-growth companies may confront new challenges in 2008.  Because the economic growth picture has blurred, now is the time to take a fresh look at the human capital practices and policies that drive business outcomes. 

Management can apply human capital practices to adapt to changing business conditions by thinking through four dimensions of these practices. The four dimensions are talent acquisition, performance management, compensation practices, and employment risk management.  I will cover the first two in this entry and the last two in a future entry:

Talent Acquisition: Financial services companies, builders and suppliers are already cutting employees. Layoffs of more than 50 employees increased 11 % in 2007 over 2006, and the trend is upward.  Management teams often turn to employee reductions as a fast way to reduce costs as demand slows.

But layoffs can be the wrong answer for small, high-growth companies. Because these companies tend to operate with lean overhead, layoffs can cripple sales growth or product development.  If a downturn is affecting competitors with higher cost positions, then a recession may actually present opportunities to expand into new markets or win business from competitors by taking the calculated risk of hiring new sales, development or production resources.

Solid talent management linked to the business strategy is vitally important in a downturn.  Management teams should be talking now about two talent-related questions:
• As the economy slows, which initiatives should the company scale back – and which should be accelerated? For example, offshoring, automation or productivity improvement initiatives may need to be accelerated – potentially requiring reallocation of talent into these initiatives. 
• Does the company have the right talent, in the right places, to adapt effectively to changed business conditions?  A talent plan reflecting changed management priorities may include reassignment, reductions in areas of lower priority, and targeted new hiring to boost high-priority capabilities.

Answers to both questions depend on sound analysis of how the changing economic environment is likely to affect the business – not simply a near-term cost-reduction target. Layoffs are a useful management tool when used as part of a broader strategy of talent acquisition, focused on the long-term value creation strategy of the company.

Performance Management: When companies are growing rapidly, management teams often discount the importance of disciplined performance management practices, including goal-setting, performance assessment and pay-for-performance practices. During a downturn, sound performance management can help keep the company focused on strategic priorities, fix performance issues, and target incentive comp on achieving business results.

As economic conditions evolve, two performance management questions can guide effective performance management practices:
• Has the company established measurable performance goals for every employee, and linked these goals to the core elements of the company strategy?  Management teams facing economic downturn need to be certain that every employee understands what has to be done, and how progress and success are to be measured.
• Has the company linked compensation practices to employee performance against assigned individual and company goals?  As resource constraints tighten, employees and executives need to know that compensation increases and incentive compensation awards are closely tied to performance. This linkage allows management to be confident that scarce compensation dollars are being applied to maximum effect.

Economic forecasts may brighten or darken in the weeks ahead, but some prudent human capital planning can help keep companies well-positioned to compete successfully.