Downturns, recessions and periods of economic stagnation are the norm, of course—economies endure these inevitable cycles, and innovation, positive change and fresh opportunities often result. But the onset of financial hardship puts human capital strategies to their ultimate test: Are people an investment to be managed or an expense to be reduced? Rather than overreacting to bad economic news, companies that stay the course in tough times and bring solid solutions to their workforce challenges are better positioned for the long term.

    For starters, it’s important to understand that the measures taken in past downturns—such as simply cutting people to match revenue loss—may not be the best ones this time. The causes and circumstances of this downturn are different. In addition, it’s crucial that business leaders maintain a disciplined perspective. Over the past 60 years, economic downturns have lasted, on average, 11 to 18 months, so there’s a built-in risk to any sweeping organizational changes—major layoffs, pay cuts or freezes—that proceed from a short-term orientation.

    If anything, we’re finding that companies are committed, at this early stage, to staying the course more so than not. Of some 400 North American companies surveyed by Mercer in recent weeks, 64 percent intend to maintain their budgeted staffing levels; 87 percent are not considering any change to their compensation budgets; and 93 percent are not instituting any salary freezes at this point.

    That’s just a snapshot, of course, and things can change rather quickly. But what isn’t going to change anytime soon is the ongoing war for talent amidst global demographic shifts, as the aging of populations around the world puts greater pressure on organizations to recruit and retain the optimal workforce for long-term success. In the U.S., immigration provides an advantage over other countries that have limited or declining access to talent, but organizations everywhere must take this demographic challenge into consideration when thinking about how to weather an economic downturn.

    Most companies have come to realize that talent is their only sustainable form of competitive advantage—a reality that wasn’t so evident during past recessionary periods. As recently as a decade ago, the way of dealing with revenue shrinkage was rather simply to shrink expense proportionately as a means of maintaining earnings. Now, with scarcer talent at many levels, replacing downsized staff may take longer—and never reach pre-reduction quality.

    Surely, there are companies that will have to take a hard look at people-related reductions. But, rather than approaching expense reduction with a broad brush—if not a blunt instrument—companies should consider the areas in which any thinning of the talent ranks could render them uncompetitive when the economic climate improves. By the same token, they have to consider where their talent mix could use some refreshing, and be willing to make the necessary surgical decisions. And on a more macro level, companies need to think about managing their human capital programs more strategically, to get the most out of them and drive out costs at the same time.

    That means, for example, taking a total-rewards perspective—holistically considering base pay, variable pay, benefits, and career development opportunity—and thus controlling the overall human capital cost in a larger context that addresses how employees value their rewards as well as how those rewards are measured. Ultimately, it’s a matter of managing and investing those costs wisely and strategically, so as not to lose the competitive-edge talent that will not only help carry the organization through a downturn but will position it best for the long term.

    At the same time, and especially in an economic downturn, companies should acknowledge their individual situations and look first at their overarching human capital strategies. Do they reflect specific business environments? One-size-fits-all solutions rarely make sense in today’s global business context. In a highly competitive environment, for example, HR practices must not fail to reflect effective talent acquisition and retention. In an environment where profit margins are thin, people strategies must be calculated, or recalculated, to respond to top-line pressure. And in any multinational business, strategy should allow for flexibility, reflecting different degrees of competitive pressures in different geographies.

    Inevitably, some industries will be better positioned not only to weather the economic storm but also to manage their way through it and come out stronger than before. And some forms of ownership will have more leeway than others. Private companies, for example, can devote themselves to long-term human capital strategies without being subject to the pressures of Wall Street and quarterly inquisitions on their business results. But organizations that view the looming slowdown as an opportunity to take an even more strategic approach to talent will succeed over the long haul.

Workforce Management Online, March 2008 -- Register Now!