How HR can get ahead of a potential recession
Are we headed for a recession?
As the coronavirus spreads across the globe, markets have taken a hit; notably, the Dow Jones Industrial Average dropped 900 points last week—ending one of the worst weeks since the 2008 financial crisis before rebounding a bit this week with news of possible coronavirus stimulus.
How impactful is the spread of the virus going to be on the health of the economy? Should employers and employees be concerned about their retirement plans?
“The odds of a recession are roughly a coin toss, and that’s exceptionally high,” Edward Al-Hussainy, an analyst at Columbia Threadneedle Investments, recently told the Washington Post. “Conferences are getting canceled. Corporations are asking people to work from home. Schools are getting closed. That is a massive hit to demand.”
Additionally, the economy’s rate of growth slowed for every quarter last year as the trade war with China and other countries also took a toll, especially in the manufacturing and agriculture sectors. Late last year, the International Monetary Fund downgraded its expectations for global growth in 2020, when several major countries—including Germany, home to Europe’s largest economy—were technically already in recession.
“There’s a slowdown in the U.S. economy, but no signs yet of a recession,” Gad Levanon, chief economist and head of the Conference Board’s Labor Market Institute, said late last year. Even so, most experts say the U.S. economy is overdue for some sort of economic contraction, whether it occurs this year or in 2021.
Related: Coronavirus: HR’s role
However, economic downturns can present opportunities, says Levanon.
“I think it’s important to consider that, during regular times, companies often don’t have the energy or willingness to reorganize, to evaluate what types of jobs could be outsourced or offshored, for example,” he says. “At the same time, a recession is—if you have the budget—a good opportunity to pick up some high-quality and cheap talent because many companies are going to cut back significantly on their hiring.”
Even if a recession does occur, Levanon adds, HR leaders should keep in mind that any loosening of the historically tight labor market will likely be short-lived.
“We’re operating in an unprecedented demographic environment where the working-age population is barely growing at all,” he says. Although a recession may temporarily ease the talent shortage in some areas, within a few years, the labor market will be as tight as ever, he cautions.
Although the last recession—the so-called “Great Recession” that started at the end of 2007—was severe, it’s important to keep it in perspective, Levanon says.
“That was the worst recession in 75 years or more,” he says. “We’re very unlikely to have a recession of that magnitude any time soon. My advice would be to expect that the next recession will be much weaker than that and that companies will not have to go to the extremes that they did during the Great Recession.”
Nevertheless, economic downturns—prompted by global health crises or otherwise—often leave companies with little choice but to cut costs. It’s wise, therefore, for HR leaders to begin developing some plans ahead of time, rather than waiting until an actual recession is upon us, says Levanon.
“It’s better to strategize now, rather than during the period of panic when revenues are dropping and everyone’s hysterically trying to come up with a plan,” he says.
In light of that, here are six things for HR to keep in mind, based on interviews with experts in the field.
- Remember Lessons from the Last Recession
Downturns can be especially difficult for frontline managers, who are often tasked with delivering bad news directly to employees. During the Great Recession, managers suffered greatly, says Brian Kropp, Gartner’s chief of HR research. As companies cut costs relentlessly to stay afloat, managers ended up with fewer resources and greater responsibilities, or “spans of control.”
“Yes, you’ve saved money from reduced headcount, but now you’ve got all your managers spending more time doing stuff that someone else had been doing,” says Kropp. “The net cost of all that additional time is actually more expensive than the savings you got by reducing hard costs.”
CFOs tend to have an enormous amount of power during downturns and recessions, he says. It can be difficult for HR to challenge cuts proposed by the CFO, even if HR thinks they’re shortsighted.
Kropp suggests that HR leaders think of effective ways to illustrate the potential disadvantages that such cuts can have.
“It’s important to strike a balance between ‘hard’ and ‘soft’ cuts,” he says. Reducing headcount in one area may lead to immediate savings but lower productivity in the long run. HR can help put this in perspective for leaders by discussing the “total cost” of proposed cuts.
“The more you can quantify the ‘soft cost’ to CFOs, the more leverage you may have,” says Kropp. Frame things using metrics that the entire organization understands and cares about, he says. “If a cut is going to result in managers spending an extra half-hour a day on something, quantify it: ‘This translates to 10,000 extra hours of managerial time.’ If you’re a beer distributor, calculate in terms of kegs delivered. If you’re a call center, quantify it in terms of additional wait times for customers calling in.”
High-potentials may also run for the exits, seeing fewer opportunities as cutbacks are made, says Kropp.
“When budget cuts occur, frontline managers often assume that they don’t need to worry as much about people-related issues,” he says.
Although job-search activities do tend to decline for the average employee, that’s not true for the high-potential ones—their job-search activity tends to increase during downturns. “After all, they’re typically asked to take on more work and responsibilities during such times without any corresponding increase in pay. These employees also tend to want to get ahead, and when they see the company struggling, they see less opportunity for doing so. At the same time, many companies see downturns as a great opportunity for poaching talent.”
Finally, remember that how employees are treated during a recession will have post-recession implications.
“It’s very common to immediately focus on cost reduction and lose sight of the human side of recessions,” says Michael Stephan, a principal in Deloitte Consulting’s Human Capital practice.
The biggest people-related challenge companies had coming out of the last recession, he says, is that the employees who remained never forgot how those who were laid off were treated.
- Mitigate Stress and Uncertainty
Not surprisingly, a recession can be especially stressful for rank-and-file employees—and, given the current questions about the impact of coronavirus—HR must do what it can to ensure the organization’s culture is up to the task of helping workers deal with uncertainty, says Steve Pemberton, CHRO of HCM vendor Workhuman.
“Don’t make the mistake that the current culture is sufficient for this—it rarely is,” he says. “It necessitates a shift in the way you’re going to deal with uncertainty.”
The stress employees tend to feel during a downturn mirrors the feelings that may accompany mergers and acquisitions, says Pemberton. The best approach for leaders and managers to take during such times is a firm commitment to open, consistent and honest communication and regular feedback.
“All of those things can reinforce that spirit of loyalty and confidence, which takes the biggest hit during such times,” he says.
Despite the stress they themselves may be feeling, senior leaders simply can’t afford to retreat within their offices, says Pemberton. “You don’t want to bury your head in the sand and ignore the uncertainty people are feeling,” he says.
Even simple things, such as walking around the office, can help boost morale, says Pemberton.
“It says ‘I’m here, I’m in the fight too, and I’m just as committed as I am asking you to be,’ ” he says.
One of the best remedies for flagging morale is to give employees a sense that they have an active role to play in turning things around, says Pemberton.
“People are most motivated when they feel as if they have some power to impact a situation,” he says.
Having employees serve on teams that identify potential efficiencies and ways to save money can not only boost morale—it can also bring in actionable ideas that could potentially save millions, says Pemberton.
“Make employees your partners,” he says.
- Don’t Forget Employee Wellbeing
A focus on employee wellbeing has taken hold at many companies today, and for good reason: Workers’ emotional, mental, social and financial health are all just as important as their physical health.
All of these factors will be put to the test during a recession—especially so as fears over coronavirus continue to affect wellbeing. That’s something HR will need to keep in mind, even as pressures grow to cut costs.
“There’s a tendency to think that the only way to handle employee wellbeing is through things that cost a lot of money,” says Laura Hamill, chief people officer and chief science officer at Limeade. “That’s not true.”
The most important factor when it comes to employee wellbeing, she says, is a supportive organizational culture.
“The whole organization has to rally around employees and care about them as human beings,” she says. “You can still do that even when money is tight.”
Indeed, it’s probably more important than ever during stressful times, says Hamill. Leaders must set the tone, she says, followed by managers.
“It doesn’t feel authentic if HR is talking about it while leaders are doing things that don’t reflect that,” says Hamill.
Managers can do this simply by asking employees how they are and how their work is going.
“Show them you care about them, including how they’re doing outside of work,” she says.
- Be Vigilant on Ethics and Behavior
During a recession, managers and employees may feel it’s necessary to cut corners to save costs.
They may also be tempted to act in ways they otherwise wouldn’t during normal times, warns Kropp.
“We’ve historically seen that, when companies go through any sort of budget-cutting process, you see a 30% increase in observed employee misconduct,” he says. “By that, I mean things like falsifying expense reports and ‘booking bad business’—in other words, if a customer says they might make a purchase, a salesperson will say, ‘We’ll go ahead and count that as business’ when normally they wouldn’t.”
Part of it is due to pressure on them to close deals and make money, says Kropp.
“We also see things like employees deliberately not reporting workplace injuries,” he adds. “Their thinking is ‘I don’t want to risk getting laid off if I report this injury.’ That’s why it’s really important for HR to reinforce the company’s values and ethics during times like these.”
- Purpose Can be a Great Unifier
During recessions, HR often assumes employees will “lean in” to help the organization get through the tough times. In reality, they may do the opposite.
“In fact, they often tend to ‘lean out,’ ” says Kropp.
In other words, they tend to adopt the mindset of “I’m not sure what to do right now, so I’ll wait to be told what to do and I won’t try anything new,” he says. “One of the most important things that you, as an HR leader, can do is to ensure the workforce remains motivated and engaged so they continue to lean in with you.”
Purpose and meaning are vitally important to employees today, yet most leaders consider themselves woefully unprepared for the challenge of linking everyday work to a larger purpose, says Stephan.
“Our Human Capital Trends survey last year found that 84% of respondents rated ‘meaning’ as important, yet less than 10% said they were prepared to address the concept of employee experience and improve the linkage between work and purpose,” he says.
Managers have a crucial role to play in helping employees see the bigger picture, adds Hamill. She recommends that managers have “line of sight” discussions to help employees understand how the work they do is connected to their team’s goals and the larger organization’s mission.
“When times are tough, it’s especially important to have a sense of meaning in our lives,” she says. In healthcare settings, for example, some hospitals focus on helping every employee see their role in its mission, while others don’t bother, says Hamill. “You can really see the difference in so many ways.”
- Continue Investing for the Future
Stephan consults regularly with some of the largest and most well-known companies in the U.S. A number of them are, not surprisingly, focused on how to prepare their workforces for the changes that automation and machine learning (aka artificial intelligence) will bring to many of today’s jobs. Managers, in particular, are seeing their roles greatly altered, and this is giving rise to what Deloitte is calling the “superjob,” Stephan says.
As an example, he cited a large company that operates massive distribution centers. At those locations, many jobs that had been performed by humans now are being performed by robots, thanks, in part, to it being so hard to fill these often-grueling jobs in a tight labor market. At the same time, many vital tasks are still done by humans.
That’s why a manager’s role at distribution centers like these is becoming a superjob—he or she must not only have the technical and business expertise necessary for the work but must also be able to determine when hand-offs between the robots and the humans will occur and when changes in such arrangements may be necessary, says Stephan.
Likewise, at a pharmaceutical company, being a manager in the research-and-development division has evolved from overseeing human workers to managing both humans and chatbots, as more basic R&D functions have become automated, says Stephan.
“A superjob is developing new technical capabilities while at the same time figuring out how to manage humans and bots side by side,” he says.
According to Deloitte’s Global Human Capital Trends survey, 41% of respondents are investing in automation extensively across multiple functions, with AI enabling human workers to focus on higher-value tasks.
Superjobs require a combination of technical skills and soft skills such as communication and collaboration, says Stephan. They often bring together work and responsibilities from multiple traditional jobs and are enabled by tech that can augment and broaden the scope of work to be performed.
“A superjob requires the ability to know what’s working and what isn’t, and when and how to make necessary changes,” he says.
Learning and development is often first in line for budget cuts during downturns, but these moves can be especially shortsighted today, says Stephan. Decades of cost-cutting means there’s little left to cut, yet ongoing changes in the global economy mean companies will have to continue reinventing themselves.
“A recession presents a great opportunity to control costs and improve experience by looking for ways to embed AI and [robotic-process automation] to change how work gets done,” he says. “HR leaders are expected to own the future of work—they’re at the center, so ultimately they are the orchestrators of preparing for and managing through a recession.”
Senior digital editor Nick Otto contributed to this report.