This recession is teaching us once again about the trade-off between people and profits. While companies scramble to get through financially – by postponing investments, cutting costs and managing cash, it’s important to keep the other resources healthy too. Thus a recession is a great environment for learning how to manage finances AND manage the human resource and customer relationship dimension optimally.
Case in Point #1: What to Cut in Exec Ed programs?
A leading business school cut back on its (non-degree) executive education program offerings as their client base was cutting back on their executive education budgets. They cut what they considered the “soft” courses, like those on values-based leadership and organizational culture in favor of courses on finance reflecting their clients’ desires. Their clients’ rationale: “In tough times, it’s important that all managers understand finance better. We’ll tighten our belts, make wise financial decisions and weather the recession better.”
The problem is that business success is about more than just the financial side. Sure, we need to be extra attentive to cash flow in a recession. But with all eyes on finances, we take our eyes off other important resources, like employees and customers. Because so many companies do just that, a recession is a wonderful time to make huge strides on the people and customer dimension of your business. What you do in either of those areas will stand out in a time when so many companies withdraw behind their drawbridges.
Thus how ‘bout courses on Turnaround Management that emphasize these other important drivers of business success, and how to inspire and Lead people through a recession?
Case in Point #2: The Hidden Costs of Skimping on the Human Resource
In their efforts to maintain profit margins (and thus their standing with Wall Street and their shareholders), companies can unintentionally injure their companies. A young man I talked to recently, who works for a large financial services company, described the impact of his company’s intense focus on the financial side. As a result of this financial focus, they are reluctant to hire more staff even when customer demand warrants it. (This is why reported “productivity” goes up at the start of a recovery: Output goes up while the growth of human resources is restricted.) So, though their profit margins look good, a closer look shows they are shooting themselves in the foot.
This man normally handles about 60 clients, providing valuable client service in support of their companies’ financial services to corporations. Now he is handling more than 90 (at the same pay of course)! Not surprisingly, he is highly stressed. He shared with me that many of his colleagues feel the same pressure and are envisioning the day when they can move to a company that respects their employees. This is not an isolated case. Research shows that in a downturn, employees are actually more interested in looking elsewhere for better opportunities. So, while companies are squeezing out more profits, they are weakening their human resource, risking even losing their best people.
…And this also results in Tainting the Customer Relationship
He also shared with me that, with 50% more work, it’s impossible to be as careful and thorough as in “normal” times. Thus there are screw-ups in serving customers. These of course do not go unnoticed by customers, so customer satisfaction (and loyalty) diminishes.
Thus this company, to keep its profit margins up, is damaging two other resources – Human Resources and Customer Relationships.
How much to invest in Human Resources?
The above examples raise the question of just how much to cut back or invest in Human Resources, especially in bad times. Consider the following examples – two different routes; two diametrically opposed results.
- A now defunct electronics retailer was facing hard times. Management went through the financial statement, and (in an effort to cut costs to raise profitability) decided to lower the pay of floor sales staff to Wal-Mart levels. The immediate result: Bingo, an increase in profitability! But the real impact of this move was to drive away knowledgeable sales staff. Guess what that did for sales? Customers went elsewhere to get guidance in buying complicated electronic equipment, and this company was soon history. This is not an isolated example of companies cost cutting their way out of business!
- Now consider the story of Costco, a leading U.S. retailer. They have routinely paid their floor sales staff well above industry pay levels. They “make up” for this by spending well less than other retailers on marketing, believing that above average sales people will not only be effective sales people at work, but also will be great sales people in their communities, talking about Costco, thereby stimulating demand for their product, and increasing the pool of talented employees to come work at Costco. Wall street analysts howl that Costco is not spending enough on marketing and overspending on employees. But the company thrives.This is an example of how important it is to stop compartmentalizing business. Everything is interconnected!
Taking Proactive Action
What’s the bottom line for you? Only you can decide, but here are three steps I’d recommend:
- Sure, go ahead and go through your P&L and identify ways to cut costs – but do it in a way that is holistic. For example, employ a “continuous improvement” approach that looks at major business processes and determines how to improve those processes. That keeps people focused on why we do certain processes and how to improve their impact. In the process, that can take out unnecessary costs.
- Engage your people in doing #1. People want to contribute to their companies’ success. Engaged employees working on important company goals are more likely to be enthusiastic and innovative.
- Also, engage them in exploring ways that your company can deliver even greater value to customers. Have them survey important customers to learn a) what they value about doing business with you, and b) what their challenges and problems are. From that, you may find ways you can provide more value to them (with little or no cost). Staying in touch with customers (in productive ways) is a great way to maintain or increase customer satisfaction and loyalty.
Doing any of the above three steps can strengthen your company while competitors may be just “waiting out” the recession. Doing all three can reap huge rewards. You’ll make great strides forward. And your competitors will also be surprised when they wake up and venture out into the market place to find that you are much farther ahead than they are.