LONDON: The current economic crisis is driving unprecedented levels of job losses across the globe, as enterprises look to remove costs – and quickly. Job cuts may still be a valid option in the short term, but organisations should also be considering alternatives to be in a position to benefit when the upturn returns.

Employment costs are an obvious target in a downturn, but they may not always be the best option
During a downturn, the main emotion driving the CEO is fear of the unknown – of things such as the length of the downturn, and the impact on revenues and the client base. As employment costs can account for up to two-thirds of business costs, they are an obvious target and, given the pressures on quoted firms around quarterly reporting, many CEOs resort to the apparent 'quick medicine' of headcount reduction.

But is it economically and strategically prudent to release resources at an average cost of around ten months' salary, as well as the additional indirect costs involved, such as loss of IP, the impact on morale and the costs of re-hiring staff when the economy returns to growth?

There are too many examples of firms that simply went through their organisation and cut every group by a static, fixed percentage. Unfortunately, those teams were already running lean and were subsequently unable to respond to critical projects while still carrying resources that were inappropriate for the path ahead.

As Peter Drucker stated, "Layoffs should be a last resort …as discarding skills and knowledge is a short-sighted strategy."

Alternatives include cutting employment costs and deferring operational expenditure

Many organisations are taking a leadership position by rising above the short-term fear-driven option of headcount cutting and considering more strategic approaches.

Such activities include: four-day weeks (state governments such as Nova Scotia and enterprises such as Cisco); the removal of bonuses, especially at senior levels; cutting of insurance and pensions, either across the board or at management levels (Nissan, HP & Motorola); unpaid vacations (Dell); enforced service leave; and arrangements where staff are 'deferring earnings' with a promise to get paid back when times improve via 'loyalty bonuses'.

These employers are still cutting their employment costs and deferring some operating expenses, yet are hanging onto their core assets: their people and their knowledge.

Leadership should be about longer-term strategy not just short-term cost cutting and bonus-driven decision making

At the end of the day, the CEO still has a business to run and needs to consider what options are available in times of falling revenues. However, with the service industry accounting for a third or more of overall GDP in economies such as Australia, the US and the UK, organisations are far more dependent upon knowledge workers, their knowledge, ideas and networks. Thus, any cost-management strategies need to be more cognisant of the longer term impact of 'knee-jerk' reactions.

Management needs to lead by setting a positive example (such as at Nissan and HP) and not by revealing a fear-induced paucity of vision and confidence. Leaders will need to share the facts and realities of market conditions with employees and other key stakeholders and to seek dialogue around possible ways forward – lack of communication will kill the viability of alternatives.
Expect governmental input too, as discussions considering temporarily relaxing employment laws to enable more flexible approaches such as voluntary cuts in remuneration are already underway.

However, if headcount cuts are 'mandated', at least get an honest assessment of team strengths, and examine current and future projects to identify those key projects that are 'must haves' for the enterprise. Identify the essential teams for those projects and other critical ongoing functions, and then draw a hard circle around those groups.

It has been proven time and again that using just one stick to solve all cost-management issues is ultimately counterproductive, and a combination of such tools often proves far more effective, but visionary leaders are now putting a greater focus on retention rather than retrenchment.

The author is an analyst at advisory and consulting firm Ovum.