Wednesday, November 26, 2008

Now's the time to spend more

Nov 26, 2008

Companies able to invest in a recession will gain market share and come out stronger

By Susan Long
THE public backlash that DBS Bank suffered when it slashed 900 jobs was a classic case of 'first mover disadvantage'.

When times are tough, the first to wield the axe gets all the bad press, says Dr Stewart Black, executive director of the Insead business school's Centre for Human Resources in Asia.

Of course, the bombshell announcement, coupled by the fact that DBS is a national icon and still profitable - it declared a third-quarter net profit of $379 million, albeit 38 per cent less than last year - did not help.

But the 49-year-old says: 'It's almost impossible for outsiders to judge whether a company needed to make such a big cut. They likely considered the negative reception of going first but took the decision anyway.

'Often companies struggle with how much to reveal. The more you open the books, the more you satisfy workers. But it can make customers nervous and can give competitors an advantage.

'So did they reveal too much or too little? And was their response proportionate? Often, you can't tell until way after the fact.'

He says it is not always the case that companies should hang on to all their employees. Of late, there have been calls here to revert to the Eastern or Japanese way of viewing the company as an extended family, and sticking together through thick and thin.

But Dr Black, who spent five years working and living in Japan as a consultant and professor and has visited it extensively since 1978, says: 'Family loyalty served Japan well in the roaring 80s but they were very slow to restructure and get rid of uncompetitive assets and excessive employees after the bubble burst in 1991. It cost 17 years of stagnation.

'You have to ask if the cost of a more dramatic response would have been less costly than the response they took which spread the pain out over 17 years. Would a Western response have inflicted less pain?'

The right response, he says, is probably somewhere in between the American way of slash and burn and the familial orientation of Japan, which protects workers as long as possible.

Before companies reach for the axe, he says they should first do a cost-benefit analysis of how much it will cost to recruit, train, develop and get a replacement worker up to speed.

For a blue-collar worker, studies show that it costs roughly about 30 per cent of his annual salary to achieve this. For a white-collar worker, it costs between 50 to 70 per cent of his annual salary.

'Quite often, companies underestimate this when they reflexively cut people. They are penny-wise, pound-foolish, saving money at the moment only to spend more money in the future.'

Another common mistake firms make is failing to differentiate between high and low performers, and firing en masse. 'Research shows that top performers contribute 40 to 70 per cent more than average performers. It's important to put pressure on low performers but keep your top performers during a recession.'

One way to do that in lean times is through awards and recognition. 'It may be that sales are not as high in a downturn but the company is still doing better than others. In that case, are we celebrating, rewarding, recognising top performers?"

An inexpensive method, he suggests, is an Employee Of The Month competition. The winner gets dinner vouchers, and his picture in the newsletter.

Another way is to offer more flexibility in work hours. 'If you gave employees a choice of working flexible hours or slightly fewer hours, some may take it. They may have childcare or parent-care needs or other things they would be happy to trade 10 hours a week at work for on a temporary basis.

'They won't be able to sustain that in the long term, in terms of income, but it could be welcome flexibility for a while. This will save money, versus forcing everybody to take shorter hours or laying people off.'

Beefing up development opportunities also helps. This can be done through setting up a task force and offering 'temporary assignments', to look at, for example, process improvement, cycle time or customer service. 'This helps employees' development so that when the recovery comes, they have added capabilities and greater opportunities to advance.

'Sometimes taking a step back helps you leap forward. If we take on a new skill, there is a learning curve. A good time to put in that investment is during a recession, so that you're up that learning curve and can gain all the benefits at a time when the economy is recovering. That way, you get acceleration during the recovery, versus a company that waits till the recovery to put in that investment.'

In his past 20 years of researching 50 different companies worldwide, he says over 85 per cent enjoyed a positive return on their investments in marketing, operations and human resources made during recessions.

Now is not the time to cut back but spend more, he urges. 'If companies have strong balance sheets and the liquidity to make investments, there is no better time to gain market share, retool and emerge stronger.

'So far we haven't had a recession last forever. Every recession has been followed by a recovery. If you prepare well for the recovery, you can catch the front of the wave and surf out in front of your competitors.'

Unfortunately, most companies look only at how dire the here-and-now is, and forget that things will get better. So, a bad economy is the best time to hire good talent.

'You can get the best of both worlds by keeping your best people and going out to grab your competitors' best people. Now coming out of the recovery, you're in fantastic shape. You've kept your best people, you've got rid of your worst and you've hired your competitor's best.

'You've made investments so that your learning curve will match the recovery curve. With that, you're firing on all 12 cylinders.'

Additional reporting by Cassandra Chew

Bosses, if you must make cuts, here's what to do

It is better to do your calculations thoroughly and then retrench in one fell swoop, than make multiple cuts as things worsen, says Dr Stewart Black, executive director of the Insead business school's Centre for Human Resources in Asia.

'By the second cut, remaining employees will wonder if they will survive the third or fourth round. The impact is counter-intuitive. Instead of working harder to keep their jobs, they get anxious and lose concentration.'

Because misery loves company, they will spend all their time commiserating in the hallways. Productivity, he warns, will plunge further.


'Employees are human beings first, economic animals second. If you didn't get cut, but your friend does, it's your friendship heart that kicks in first,' he says.

According to research done on car companies where many were let go in the 1980s, for companies where job cuts were perceived to be fair, productivity did not go down or up. At best, there was a neutral effect.

But where people felt their dearly departed were unfairly targeted or treated, they slowed down their work to 'exact revenge'. He says: 'Even though it was not in their own economic interest to do that, people's hearts obviously won over their heads.'

As such, the 'why' and 'how' of retrenchment becomes paramount. 'Was it because the person was of lower seniority or belonged to a poor performing unit? Was there prior consultation or did they just come in one morning and get escorted out by security?'

If a company is seen to be reasonable, even if not generous, productivity goes back to neutral. 'Quite frankly, neutral is good. In a slowdown, the last thing you can afford is any further drop in productivity.'


'Like a sports team, you need to inspire the survivors to fight on. When you are losing, many players feel like mentally and emotionally giving up. Once they do, the game is over,' he says.

'However, the rally cry must be based on reality. If you are down by 50 points in basketball with one minute to play, promising the players they can win the game if they try just doesn't ring true.'

In some business cases, the goals need to be more realistic.

'For example, General Motors recently announced that for it, winning would be surviving the next two years. For many companies, winning could be just surviving. In other cases, you can help employees see that the actions being taken now can help the company emerge from the recession even stronger.'

'If you've never invested in employees in past downturns, don't pretend to start now. Do it only if you are serious. A while ago, companies seized on participative management. They went around asking employees for opinions but ignored it. They raised expectations, then dashed them. They would have been better off never asking for input rather than asking for it and then ignoring it.'

'In both good times and bad, companies with strong cultures, like Disney, Shell and BASF, have low staff turnovers. One of the things to think about is how do I enhance my working environment such that even if my employees have portable skills, the benefit of moving to a new employer isn't worth the cost of losing the company-specific culture. Studies show that a 10 to 20 per cent pay differential can be offset with a good company culture. Now, lots of people will leave for a 50 per cent pay raise. But companies are not losing most of their people to 50 per cent more, they're losing them to 10 to 20 per cent salary increases.'

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