The global economy is at a critical juncture, with many countries now facing a very real risk of recession. With economies plagued by inflation, supply chain shocks, and slow growth, the risk of stagflation is becoming stronger by the day. In this uncertain climate, many companies, including blue-chip firms, have announced a hiring freeze. Yet others are laying off workers. But are pink slips inevitable during times of economic uncertainty? Or can they be avoided?
To answer that, we need to understand why companies fire employees during tough times.
Many companies hire indiscriminately when the going is good. The hope is to scale up quickly and grow quickly. This isn’t sustainable.
During the 2008 global financial crisis, Citigroup got a $20.5 Bn bailout from the government. That wasn’t enough for its financial health. The company also cut more than 50,000 jobs, making it one of the biggest layoffs in history. This means that the taxpayer and the laid-off worker bear the majority of the downside risk, while the company reaps the benefits when the economy is doing well.
The Quagmire Of Hire And Fire
When companies let go of skilled employees, there is a massive loss of product and process knowledge that leaves with them.
In India in particular, it is common knowledge that the education system is not the best at equipping students with the skills that the modern workplace needs. Every year, companies spend crores of rupees and countless man-hours training and enabling new joiners before they start working.
Granted, technology has eased the way by making organisational knowledge more digitised and centralised, but that assumes a level of discipline on the part of an organisation that rarely exists in real life. As organisational knowledge broadens, the ability to sift through it, make sense of it, catalogue and index it, and understand its applications becomes an overwhelming task.
A recent report by management consultancy firm, Korn Ferry, talks about how the global economy could face a shortage of 85 Mn jobs by 2030. This is mainly because an entire generation of experienced workers would have exited the industry by then, but younger employees would not have had the time or experience to catch up to the skill levels required for the high-skill jobs they leave behind.
This highlights the risk that companies face when they let go of large swathes of people during downturns. When things return to normal, companies end up having to spend that money all over again to bring back this lost knowledge, resulting in little to no economic benefit from these strategies.
Then there are the intangible costs to consider. When employees spend 2-3 years or more at a company, they build a rapport with multiple stakeholders and functions. They have a better understanding of the company’s expectations. They build networks within the company that can lead to greater collaboration and higher productivity.
These can be thought of as ‘Intangible Efficiencies” All of this is lost when they’re laid off and the process of building these intangible efficiencies starts again. It’s like the phrase “One step forward, and two steps back.”
This has an impact on the morale of existing employees who have ‘survived’ the round of layoffs. As a very human response to such a situation, the remaining employees either start to look for another job, fearing further job cuts, or lose focus in a fearful, depressed environment at work. Consequently, there is a sharp drop in productivity among the remaining employees.
Of course, there’s a subset of employees who stick in their jobs for several years. These are hard workers who value stability and predictability. Often, they are in crucial middle management roles. These workers add enormous value to a company in the long run, but companies can scare them away when they develop a reputation as a ‘hire and fire’ workplace.
So, while laying off workers may secure a company’s financial future in the short term, it may jeopardise its long-term prospects by scaring away qualified candidates.
These hidden costs of lost organisational knowledge, lost intangible efficiencies, and declining employee morale are never quantified and factored into the savings from a “hire and fire” strategy.
A Long-Term View Of Hiring
It’s high time companies emphasised the human in ‘human resources. For starters, hire wisely when times are right. Not skewing pay scales in an industry when times are good, to ‘acquire’ people is important for long-term survival. Usually, these highly-paid but insufficiently skilled people are the first ones to get the axe.
After hiring, train, train, train.
70 employees who are trained well might be more productive than 100 employees who have been hired in a hurry and put straight to work.
Consider hiring gig workers. Relying on freelancers, part-timers, and gig workers gives companies better control when they’re uncertain about long-term demand. Gig workers are the future of the workforce. Hiring gig workers can lead to greater productivity and lower fixed costs for employers. For employees, options increase, and earning potential also goes up.
Companies also need to build a culture of security, transparency, and honesty. If an unexpected financial situation has hit, leadership should do all they can to protect jobs. During the Covid-19 pandemic, leaders in several companies chose to take pay cuts to retain their employees. When that’s not enough, have an honest conversation with your employees.
A recent study of white-collar employees in the US by Insight Global found that 78% of respondents were worried about losing their job in the next recession. More than half were willing to take a pay cut rather than get laid off. Pay cuts for workers at middle and entry levels aren’t ideal, but sometimes they’re necessary to keep the business afloat.
This was first published on Inc42