Don Sull's blog

Over the past few weeks, I have read dozens of special reports produced by consulting firms on managing in a downturn. Most are banal—heavy on data, light on insight, and devoid of non-obvious recommendations. There are exceptions. The Boston Consulting Group and the European Association for People management recently published an excellent white paper called “Creating people advantage in times of crisis” which provides some very practical advice on developing human resources during a downturn, as well as some surprising findings on what companies are actually doing.

The authors conducted a survey of over eight hundred HR executives in 30 European countries across 15 industries. Survey respondents ranked actions taken in past downturns (including industry and country specific downturns) in terms of their effectiveness. Two of the three most effective actions related to building talent. The most effective step companies took in past recessions was basing lay off decisions on individual performance, to weed out under-performers. The third most effective step was hiring star performers from competitors.

At the other end of the spectrum, the three least effective actions in the last downturn–cutting back on individual training, reducing functional training, and cutting apprenticeships–degraded the quality of companies’ human resources.  Their costs–lower employee commitment, deterioration in skills, poor positioning for upturn–outweighed their benefits compared to other cost-cutting measures.

Surprisingly, companies persist in taking steps that they know to be ineffective.  Despite their poor showing in the past, reductions in training were among the seven most popular actions companies are taking in this recession. Linking layoffs to performance and hiring stars–despite their effectiveness in past downturns–ranked 8th and 19th in terms of usage in the current crisis. in short, European managers are doing too much of what doesn’t work and not enough of what does.

What gives? One explanation might be that labor laws prevent effective policies in some European countries. A close look at the numbers undermines this hypothesis. There is no systematic pattern of action across countries that vary in labor market flexibility. German and French executives are nearly as likely to fire on performance or hire stars as thier UK counterparts. Another explanation is that managers prefer easy cuts that don’t work over difficult decisions that do. Again the data disconfirm the hypothesis. On average the companies surveyed are 50% more likely to fire full-time employees than part-timers, who are surely a much easier target.

A more compelling explanation is that many senior exectives are framing the downturn solely as a threat to their existing business, and missing the opportunity to build human resources.  Managers are missing a golden opportunity to enhance their firm’s ability to execute by weeding out underperformers, hiring stars, and invest to build the skills the workforce will need when the economy recovers. My next post will discuss how firms can effectively hire stars in a downturn.