One Year Later—Flexible Downsizing and Hard Choices Post-Recession, Pre-Recovery

A year ago, the economic downturn was in full gear.   As layoffs gained momentum, I loudly promoted a more flexible approach to downsizing as an alternative to knee jerk job cuts.  If executed correctly and strategically, compressed workweeks, telecommuting, reduced schedules, furloughs and sabbaticals improve productivity and reduce costs in numerous areas (e.g labor costs, real estate overheads, operating costs), therefore, limiting or avoiding layoffs.  Additionally, this very same flexibility simultaneously achieves other business objectives, such as disaster preparedness in response to the H1N1 virus, or expanded global client coverage to generate new business.

Over the past 12 months many people have said, "Thank you.  You made me think of other options and as a result we were more creative and flexible in how we managed through the crisis."   But about three months ago, I noticed a shift.

With glimmers of a recovery finally on the horizon, flexible downsizing entered a new post-crisis, pre-recovery phase.  In this gray zone, a flexible approach to managing productivity and costs in all areas remains critical but involves a new set of choices:

  • What about businesses that did use flexible downsizing strategies, but a year later, aren’t starting to recover and may never recover?  Are more layoffs necessary?  If yes, how do you make those cuts without undoing the benefits realized from having taken a more flexible approach in the heat of the downturn?
  • How do you compensate and retain top performers who were willing to sacrifice in the thick of the crisis, but now see a recovery and want to be rewarded at pre-recession levels, even if the business hasn’t recovered and the money isn’t there?

Before we address the "how to" in this next phase, let’s take stock of where we actually are a year later:

Flexibility survived the downturn

Lisa Belkin recently wrote about Eli Lily’s decision to discontinue some of its flexibility offerings in her The New York Times Motherlode blog.  The post implied that work life flexibility has been a casualty of the recession.  On the contrary, the facts show just the opposite.
  
In March 2009, the nationally representative Work+Life Fit Reality Check survey found that 66% of full-time employees said work life flexibility in their organization stayed the same, and 19% said it actually increased.  Only 13% said it had decreased.  A couple of months later, Families and Work Institute released a nationally representative study of employers that reported an even more positive picture.  FWI found that 81% of employers reported maintaining the workplace flexibility they had, and 13% were increasing what they offered.

While the experience at Eli Lily does not represent a national turn away from flexibility, it is a cautionary tale.  It illustrates what happens when employees think that flexibility is a benefit or entitlement.  Unless flexibility is a process-based part of a business’ operating model, it can’t adapt when circumstances change.  It can only disappear.  And many aspects of the pharmaceutical industry’s business model are under pressure.  That is why, as I wrote back in May, the question is no longer "if" flexibility, but "how" flexibility, or how to finally integrate it into the business operating model and do it in a way that works for all parties. 

Great! The recession is over, BUT…

According to the National Bureau of Economic Research, "the economic recovery is likely to be more moderate than those typically experienced following steep declines."   This slow-burning recovery is causing trouble for employers who have taken a flexible approach to managing costs and minimizing layoffs.  First, employees hear the recovery has started so are beginning to question the need for ongoing sacrifice.  But within many businesses it’s an uneven recovery at best.  Some divisions are growing and profitable while others are showing less promise, even long-term.   This is creating a new set of challenges to manage through.
  
Another real issue is "fee compression."  The work has returned and requires the same number of headcount to complete, but is generating less revenue.   This means tough choices still need to be made, and creative, low-cost means of reward and engagement pursued.
   
Yes, it looks like a (really) jobless recovery

The Business Roundtable reports that CEOs are not expected to increase their hiring or capital spending even though "a majority expects sales to rise in the next six months."  In addition, numerous unofficial recalculations already put the jobless or underemployed rate above 10%.
  
This scenario requires carefully weighing the impact of more layoffs from an individual, corporate, national and global level.  As I blogged last year, valid arguments can be made that trying to limit layoffs as much as possible doesn’t violate a corporate leader’s fiduciary responsibility to maximize shareholder return.  The post is worth rereading, "Managers Uphold Fiduciary Responsibility with Alternatives to Layoffs—Expanding the Cost/Benefit Analysis."

Furloughs have emerged as the flex downsizing option of choice, but..

This is especially true for state governments, but also for the private sector and higher education.  In the recent issue of HR Magazine, "Avoiding the Furlough Fallout," author Adrienne Fox reports that according to the Bureau of Labor Statistics, "The number of people furloughed, or working part time for slack work or business conditions shot to 6.5 million in June, up from 3.7 million the prior year…In June, Watson Wyatt reported that of 179 HR executives surveyed, 13% had imposed mandatory furloughs and another 6% expected to do so in the next 12 months."

As we think about the role of flexible downsizing as a strategic lever in this post-recession, pre-recovery moment, it’s important to remember that furloughs are not the only option.   Sabbaticals, compressed workweeks, telecommuting, reduced schedules also achieve cost containment and productivity goals when part of an organized, strategic plan.
 
But concerns about furloughs—effective implementation, and real payoffs—have emerged.  Some are well founded, others specifically related to the cost/benefit versus layoffs, in my opinion, are not.
 
A number of valid concerns related to the implementation of furloughs (as well as the other flex downsizing strategies) have emerged over the past year.  These issues include compliance with employment laws especially related to exempt employees and ongoing effective communication strategies so everyone is on the same page.
 
Less valid, in my opinion, are the concerns related to state government furloughs, as discussed recently on NPR.  The argument being that the associated declines in tax revenue from lower salaries and spending offset any savings state governments received from furloughs.   Also there are objections to service disruptions due to fewer employees working at a given time.
 
These arguments seem to assume that the alternative to furloughs would have been that everyone kept his or her job at pre-recession pay levels.  The truth is that the alternative would have been layoffs.  This would have resulted not only in less tax revenue but also in a greater number of individuals drawing unemployment.  Service disruptions would still have occurred, on a more permanent basis, due to the lower head count handling the same amount of work.  

Furloughs are not optimal.  It would be optimal for everyone to keep his or her job as is.  But there is a clear cost/benefit analysis supporting a flexible approach to downsizing versus cutting jobs.  Studies of past recessions have shown that the long-term benefits of layoffs are largely mythical.  Conversely, there are valuable cost and productivity benefits from a more flexible approach. 

For example, research has shown that savings from layoffs related to benefits like health care require not hiring someone back into that position for at least a year.  Studies of past recessions prove that rehiring often happens within a year of layoffs effectively cancelling out any savings.  Well, sure enough, a recent article in USNews and World Report found that 40% of employers expect to hire back some of the workers they laid off earlier in this recession.  It would have been more cost-effective to have figured out a way to keep at least some of that talent employed in the first place.
 
There are rising concerns about how to handle high performers and other employees who were supportive of flexible downsizing in the crisis but now see a recovery and are questioning the shared sacrifice.
 
In our March Work+Life Fit Reality Check survey, we found that 9 out of 10 full-time employees would be willing to adjust their schedule and/or salary to avoid layoffs in their organization.   But six months later two factors have changed:

  • Again, employees are hearing more about a recovery in the media even if the reality in their own job might be that there is no recovery in sight at all.  Still, to some employees signs of a recovery increase expectations of going back to the way things were.  But many businesses are still struggling.  Leaders are faced with whether to cuts more jobs in order to have the cash to give others back their pre-recession schedules and salary?    Or is there another approach?

The interesting phenomenon I’m hearing from managers, and confirmed in the HR Magazine article "Avoiding Furlough Fallout," is that no one thinks the layoffs are going to affect them!  This next stage in the flexible downsizing process could include some unexpected reality checks for people.  Those who might have benefited from tolerating an adjusted schedule and/or salary for a while could find themselves out of a job. 

  • A majority of workers lack of a financial cushion to absorb a pay cut for more than a brief period of time.  A recent Career Builder survey confirmed that three out of five workers said they are living paycheck to paycheck.  This could explain the push to get things back to "normal," and understandably so.  A poignant article in The New York Times about a former airline captain who now works for the same airline at 50% salary showcases how tough this circumstance can be.    

With a clearer sense of where we are a year later, what does this post-recession, pre-recovery period mean for managers and employees?  What role does flexible downsizing play in this next phase and what does it look like? These are the questions I’ll address next week when I:

  • Interview with a senior executive from a company that did execute a flexible strategy for managing costs to avoid layoffs over a year ago, and is now facing tough choices as they rethink that approach for many of the reasons listed above.
  • Share some "how tos" for the next phase of strategic flexible downsizing post-recession, pre-recovery. 

But I also want to hear from you so start thinking…get ready to brainstorm! 

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