Change in a Recession; – an fe3 mindstretch® 14 October 2008
Notes from an fe3 mindstretch® – Change in a Recession
14 October 2008
The views expressed here are the personal views of the participants and are not necessarily the views of their organisations. The following people were present at this mindstretch®:
Bozena Benton, RLF
Karen Drury, fe3
Fiona Eldridge, Coaching and Communications Centre
Andrew Massiah, Learning & Skills Council
Chris Nutt, FiSSInG
Gary Saunders, fe3
Karen welcomed everyone to the session and went through the agenda .
She then kicked off the session with a definition of recession
. Christopher Dow has conducted a study of five major recessions since 1920 and he describes recession as a phase in which output fell significantly between successive calendar years. Recently, political commentators have reduced this slightly, to falls in output over two successive quarters.
Sadly, his study didn’t define any notable predictors, although Gary noted that his wife, who works in an architectural firm, defines recession as the number of cranes on the skyline at any one time – if there are lots, recession is on the way.
Demand shocks are changes in fiscal policy, monetary policy, export volumes, terms of trade and stock appreciation
So, for example, Dow explains the 1920-22 recession to be due to a collapse of confidence and high taxes to balance the budget after the war; the 1929-32 recession was due to the recession in the US and its effects on world trade; the 1973 – 75 recession was due to a collapse in confidence, a rise in oil prices, and UK monetary policy designed to curb inflation; the 1979 – 82 recession was due to exports being hit by high exchange rates and the new conservative government’s tight budgets; and the 1989 – 93 recession was due to a massive collapse in confidence after the preceding boom. Karen asked the group what they thought would be considered the cause of this recession - a lack of confidence, fiscal policy?
Bozena thought that there were differences between this potential recession and previous ones; last time, she thought people were borrowing to buy shares, and this time people are borrowing to buy houses, and there was a more international spread to the problem.
Gary wanted to know if there was a difference between recession and depression and Chris pointed out that there was a difference between the banking crisis and the recession – considered unique at present.
Andrew thought that the recession was relative, and had been masked by borrowing, and Bozena added that the definition of poverty had changed since the 20s and that people were encouraged to go into debt.
This slide was a “brain dump” of potential responses of organisations to recession; Chris pointed out that some industries and companies have been in recession for a long time – for example Aldi and someone else suggested Dairy Crest. He thought that they might refocus to match changes in customer demands and needs. Bozena thought that organisations like Aldi and Lidl deal in cash and debit cards rather than credit cards which protects them to some extent.
Karen felt that some companies were recession proof – for example utilities and insolvency practices.
Gary thought, looking at the chart, that we could have added offshoring and outsourcing, although Chris recalled a McKinsey survey which indicates that many companies in the US are repatriating work. Karen thought that not all work was being repatriated – wiring and electronic engineering work was still strong in China and India.
Looking at the employee and culture aspects of the map, Chris felt that employees accept more direction when times are tough, citing Work Foundation research which indicates that the focus switches to management.
Karen put up another slide indicating another way of classifying organisational responses, researched by Bohman and Johannsson in 1998, who conducted a longitudinal study of strategic change in ten groups of companies between 1990 and 1995.
Looking through the phases, Chris thought he had seen this pattern over many years in financial services. Fiona wanted to know how this would play out in a franchised business, and Chris thought that the risk would be passed out to the franchisees; if you looked at milk delivery, rounds are consolidated, for example.
Gary wasn’t convinced that all industries acted like this, and Chris agreed, citing hedge funds as an example. Conversely, Karen looked at the phases and thought that they would absolutely apply to an organisation like C&A, which went into home furnishings before returning to clothes and then gradually reduced its stores across the UK, although they were still active across Europe.
She commented that she had found such research difficult to come by, and was surprised – although admittedly, it was difficult to conduct academic research in organisations whose share price is dropping through the floor! However, she did find one piece of research….
Coping with Recession – UK company performance in adversity is a piece of research conducted by Paul Geronski, Professor of Economics at London Business School and Paul Gregg Senior research fellow at Centre for Economic Performance, London School of Economics. The book is based on a large scale survey in 1993 in which 600 leading UK organisations participated. Data from the questionnaires were matched with other company performance data to see if there was a set of circumstances in which organisations would fail in a recession.
The question here was “Which of the following actions were taken in response to the problems your company has faced in the recession, and how important have they been in overcoming these problems?”
One of the findings is that of the 586 firms who responded, 107 stated that no action was taken in any of the areas listed – perhaps the impact of the recession was not as great for them.
Another of the features of the table is that most of the firms who made some response to recessionary pressures, concentrated on controlling costs. 65% of the core sample cited at least one cost control factor as being “very important”. In contrast, relatively few firms cited any of the “strategic decisions” as being very important, with the exception of “Focus on core business” – which the authors consider to be actually something that had caught management attention before the recession began, and wondered how far it was a set of buzz words, rather than an actual strategy.
Karen said that she was a bit disappointed that the immediate response – and not a particularly imaginative one at that – was to simply chop headcount, but Bozena said that one of the killers of business is poor cash flow – and that cutting headcount is quick and has an immediate impact on cash outflow, where other cost cutting measures take longer to come through.
Gary wondered if we should take into account what is driving the decision eg ownership, or bonuses (what’s rewarded).
When the research considered those firms which said they had been “extremely severely” affected by the recession, the tendency to go for a cost control response was even more marked – 91% of firms in this category made a cost control response. Going into detail in this…..
This shows responses to the question: “Did your company use any of the following methods of workforce alteration in any establishment that continued in operation in the period 1990 – 92?”
Karen pointed out the final figure on the chart – that compulsory redundancy was the most widely used methods was used by 42% of respondents – but is this all there is?!
It is evident that a major component of the cost reduction strategy that most firms chose to follow was reducing labour costs, but in contrast to what goes as standard practice, 30% actually brought forward training staff members, and 23% brought forward advertising and marketing expenditure (4% and 7% abandoned training and marketing, 24% and 26% respectively postponed the activities). Looking at R&D – 5% of respondents abandoned plans in this area, 15% postponed, and 20% brought forward.
The authors make the point that investments in intangibles like R&D, training and marketing are rarely as expensive as investment in plant, machinery or buildings – and also, true opportunity cost is lower when labour is underutilised (or reduced) – and this is particularly true for training.
Chris asked about whether or not the book went into detail about the process of making compulsory redundancies – which could be creative and thoughtful. Karen said the book was more an interpretation of the basic stats, rather than looking at qualitative data.
So, given the apparent rush to redundancy as an antidote to the recession last time – what’s happening during this recession?
Karen described what she’d been able to find in the recent press; Volvo have shed 6,000 jobs, GSK have lost 850 jobs in R&D, HP have reduced staff by 20%, 9,300 jobs, of which 3,000+ are in UK, and Barratt Development have also shed 20% of staff, or 1,200 jobs.
British Airways have lost 1,400 jobs, UBS has made 2,000 people redundant, together with HSBC who have sacked 1,000 staff from their investment arm. Going further back, 2,000 jobs have been shed from Northern Rock (about a third of staff), and Bradford & Bingley, has lost 370 jobs. Finally, Focus DIY has made 750 employees redundant.
In terms of restructuring, AirFrance/KLM are restructuring operations at LHR and pulling out of long haul market between LHR and US; Jessops has embarked on a series of store closures, expanding digital printing and concentrating on higher margin ranges through stores and websites; First Group has combined 100 divisions into 4 groups; Dairy Crest has opened new regional distribution centres in West Midlands and South East, closing Nottingham, reduced costs (particularly in head office) and increased prices; finally, Sanofi-Aventis has reshuffled its management, simplified operational management, and is widening its shareholders.
Hay Group surveyed more than 250 HR compensation executives and CEO’s across all industries. Findings included:
More than 30% of companies are freezing or considering freezing base salaries
15% are considering freezing salaries for all employees
20% of organisations will be freezing or decreasing staff levels
27% report that they have made, or will be making changes to health care benefits
20% respondents indicated that have changes implemented or planned for retirement or pension benefits
28% indicated that they have changes planned or implemented for training and development programmes
However….according to a survey by Towers Perrin, who surveyed 650 companies about their response to the recession, expanding into new product or service areas tied for first place on the list of actions planned for 2008, with overall, one in three of the respondents’ top five most likely strategic actions in 2008 remain growth-related.
The group thought that the drivers of these actions are the cost and availability of capital and market forces.
Karen asked the group how their organisation was reacting to the turmoil in the markets? And have previous activities been de-railed?
Fiona told the group that in Teaching Personnel, there tended to be a teacher demand problem in recession, as more people want to be teachers. They are therefore expecting a downturn in demand in roughly May of next year onwards. They are increasing pay for their staff and prices, and diversifying within the skills market, for example, teaching assistants and other support staff. This is having an impact on the skill set of recruitment assistants and has led to the need for a sounder HR system and processes. They are also looking at overseas markets.
Chris said that Fissing members (mostly in the financial services sector) were not changing so much as continuing through an ongoing process. The anticipated key changes are in the regulatory framework and a more “rational” business base. He noted that no-one has been speaking on behalf of the banks.
Bozena thought that in construction, the competition had been hit harder than RLF, but that it was still difficult to get good staff. She thought that as a partnership, there was less impact; the company had been growing over the last few years and there had been investment in offices and IT, and although there had been some office closures where they’d not made money there has also been acquisitions. Her own role had been combined with that of Training and Development Manager, the company had capped salary increases at 2.5% and frozen capital expenditure until 2009. No bonuses would be paid and they were looking to make minor adjustments to benefits.
Andy said that the LSC was coming to an end in 2010 with 14-19 education being passed to Local Authorities. Management was focused on workforce planning and helping staff with employability development, and he himself was shadowing another sector. Secondments etc will replace people who leave. The CEO is encouraging a view of lifelong learning within the LSC, and there was no money for redundancies, encouraging people to manage their own careers. He said that Local Authorities will not be able to fund all former LSC jobs, so taking it seriously was essential. He was just about to relaunch the professional development programme and there was a panel to ensure more equality of opportunity.
Chris commented that senior executives were more familiar with the impact of human capital now and therefore there is likely to be fewer generic cuts in staff overall. Also, more foreign ownership with different operational models made this sort of wholesale firing less likely, particularly as there are other options – withdrawing variable salaries and bonuses. He did think that business to business firms will go faster if they are weak.
Conversely, Chris also thought that the banking crisis could be good for the UK as trust in the US banks was so low. Connected to this, Bozena wondered whether ethical practices and quality would be emphasised, although Karen disagreed, thinking that this focus was a “nice to have” for businesses in critical situations.
Karen then went through a personal experience where one set of changes in an organisation was stopped in its tracks by a Government directive.
The organisation had started a programme to define their values two years previously and the work had limped along for eighteen months with little happening. The organisation wanted to define the values to feed into an employer brand with which it hoped to attract new recruits. The results, when finally reached (2 years after the programme began) were fed through the organisation
through as many HR processes as possible.
However, all this good stuff was brought to a rather abrupt end with the news that following the Lyons Review, the agency was to relocate to Coventry to save costs. Management defaulted to their normal style without reference to any of the values, although to some extent they could claim the “Creativity” value as they also looked into flexible working for key employees who didn’t want to move. Unfortunately, as some of the skills within the agency are specialist and unlikely to be found in Coventry, this was seen as (and possibly was) cynical self-interest on the part of the organisation.
Karen said that they did try to see how the values could be incorporated into the redundancy criteria – but this was made more difficult as redundancy wasn’t offered to all staff, and the procedural fairness essential in this sort of exercise went missing, causing some negative backlash among employees.
This was a quote from an article printed in the Guardian in January this year:
“The majority of staff who don't want to move to Coventry feel they're being treated by management as of no importance whatsoever. And those who are moving worry about this management attitude. People are stressed just keeping up the agency’s business against this background of uncertainty and shifting timelines.”
Karen thought that what could have happened is in actuality, little different from what will happen – that the organisation will move to Coventry. However, the style of the management of the relocation could have been more in line with the values to ensure that staff – particularly those with key skills – were reassured that they meant something.
This type of change, where is was focused on attitudes rather than the outcome, is essential to keep going when the environment changes– wouldn’t have cost anything, but the benefits for the organisation would have been enormous.
Bozena asked if the values were really held or just those that senior management could live with and Anthony commented that the organisation could have run with them to manage the change, and that it was a shame that the organisation went into “instrumental” mode. He added that you needed a combination of management (process) and leadership (attitude) capability.
Karen pointed out that the recession may have some unexpected, as well as expected outcomes.
A Hay Group survey, from March this year, indicates that US graduates, seeing the weakening job market, are starting to lower their expectations and would be willing to adjust their job criteria, for example – 30% would accept a lower salary; 15% would accept their first job offer; 26% would be prepared to commute further
Karen thought that this has potentially interesting implications for the idea of employer brand – which developed in response to Generation Y’s strong values and demands.
Generation Y is the generation of young people born after 1983 and before 1997 (or roughly!). Estimates indicate they’ll make up as much as 40% of the workforce by 2014. They reject the values of their parents and consider that they should work to live and not the other way round. A study by Talentsmoothie, of 2,500 young people, found that “doing a job I love” ranked 1st in their priorities, with “earning lots of money” was far below, in 7th place. They are ready to resign if their jobs are not fulfilling and fun, and expect the opportunity to work from home, with flexible hours and decent holidays and the opportunity to take time off to do work for charities.
This is a generation that has never known, or seen, hardship, recession and mass unemployment and does not, according to researchers, fear redundancy. They are unafraid to speak their minds and if dissatisfied, will leave their employer – some estimates indicate that Generation X-ers will have had more than 30 jobs by the age of 45.
Karen wondered if, given the turmoil of the markets, their attitudes may change, of course. But if they don’t, they might just end up walking away from a company in depression – particularly as they aren’t motivated by money. Gary wondered if there would be an impact on the need for retention, particularly as there is an over supply of graduates and workers generally.
Karen suggested that this might have an impact on the need for employer brand as a concept, although many disagreed with her.
The Mckinsey Global Survey for the third quarter of this year, suggested some interesting directions for organisations. Given the rise in the price of oil and energy, more than 60% of respondents report that their companies have acted to become more energy efficient – top two initiatives are using less energy to heat or cool offices and reining in corporate travel.
22% of respondents to the McKinsey survey had shortened the supply chain and 20% had improved the efficiency of supply routes in the last six months. If this continues, what we’ll possibly see is CSR in energy conservation being achieved by default.
Karen finally pointed to one potential GOOD thing to come out of the recession….
