June 30 2021
Businesses across the globe have been severely impinged by the pandemic, that they have had to restructure operations to stay afloat, and in the quest to do so, prioritize their continuity at the cost of key value contributors, even in the form of laying off employees or switching supply chain partners.
There has been a lot of debate around the humanity of such organizations that put their survival first; yet businesses have had their fair share of arguments justifying their actions. While unempathetic is the discernment of employees, prudence is the perception of businesses.
Perhaps not! Businesses with a commitment to Corporate Social Responsibility (CSR) have always seen increases in productivity and employee engagement.
And companies with top-quartile employee engagement ratings have twice the customer satisfaction and 25% higher profits than organizations with bottom-quartile engagement ratings.
Therefore, shedding employees to cut cost is more often than not detrimental to the company itself. It results in the loss of tacit knowledge, investments in training as well as the network of relationships built by employees. What’s worse is the bad publicity making it harder to attract conscious customers and new talent, as well as its lasting effects on survivors – depicted by a lack of interest to work hard as the fate of their peers only assure them that good performance doesn’t guarantee their jobs, consequently hurting profits in the long run.
Firms that downsize their workforce by 1% see a 31% increase in voluntary turnover the next year.
Moreover, impact investors today are increasingly factoring ESG – Environmental, Social, Governance – principles into their investment decisions. Socially conscious firms that are considerate towards its people and relationships are hence poised better to attract higher investments and outperform the market.
ESG firms captured USD 51.1 billion of net new money from investors in 2020, compared to USD 21 billion in 2019 indicating the level of increased attention this topic has gained, amidst the pandemic. Prioritizing ESG issues generate superior long-term financial performance across a range of metrics. In 2020, ESG stocks outperformed the stock market across the globe – by 46% in the U.S., 20% in Europe, and 77% in Asia.
While CSR and ESG are concepts towards which businesses like to devote funds and time during profitable periods; at times of acute crisis, it tends to get deprioritized as it is an expense not all firms can afford to incur. Most SMEs laid off employees, at least temporarily, to cope with the crisis.
While organizations opt to lay off employees in multiple situations, including high performance times, what we explore in this article is the dilemmatic decision people-centric firms are compelled to make during times of distress, where the sheer existence of a company is threatened if cost is not curtailed in time. So, the two key questions we aim to address are:
1. Should firms hold onto their employees despite a difficulty to remunerate them?
As the pandemic continues to stamp its imprint, firms have had to look for profitability or cash overhaul. Businesses have adopted divergent coping mechanisms – some are adopting retreating strategies while some are either proving themselves remarkably agile or stayed resilient. In any of the 3 scenarios – Retreat, Agile or Resilient, what we look at here are better ways to handle changing workforce needs that make sparing use of staff reductions and ensure that if they do happen, the process feels fair and affected parties have a soft landing.
A. For companies coping through retreating strategies – No choice but to downsize
SMEs in certain industries such as travel and retail are teetering on the edge of closure. For example, airlines have seen reductions of up to 71% of seat capacity and around 1.5 billion passengers globally by the end of 2020, exemplifying the precarious nature and effects of the pandemic on airline businesses and the financial position of multiple firms that provide support services to airlines and airports. This daunting panorama has left SMEs with nothing but spare choice to cut back spend.
How could retreating businesses that are downsizing minimize the negative impact on employees?
Hence, firms need to exercise caution in the prioritization of dispensable costs. Start by looking at what other expenses can be cut down and trim employee expense only as a last resort.
i. Scale down asset base – Assess, if the company is paying large sums of rent on unutilized assets/unused capacity (for example, aircrafts, premises), the possibility of selling owned fixed assets such as equipment, machinery or vehicles to liquidate cash for expenses and leasing them back, and the potential to outsource distribution and warehousing to reduce rentals paid on fleet of vehicles or warehousing units.
ii. Lower sales and marketing spend – Hold back advertising and marketing expenses of products that don’t see a viable market anymore.
iii. Iron out inefficiencies – This is a specifically a high cost for manufacturing organizations, including errors, rework and idle time.
When all else fails, some companies may have no choice but to downsize workforce in order to stay afloat. While doing so, firms could explore situation-based strategies.
i. Offer pay cuts – If the short-term concern is dire, notify employees that the moment business rebounds, pay would be revised. For employees with dwindling savings, offer more notice and support with at least partial income until business bounces back/they find an alternative job.
ii. Offer no pay leave – If the outlook in the near term is unclear, offer indefinite periods of No pay leave. This way trained employees are ensured job security and are available when operations rebound, without adding to the short-term cost burden.
iii. Lay off: Communication as a tool to manage employee emotions: Be it due to downsizing, or a temporary halt in operations, inform employees that moment business rebounds, they would be commissioned to work. Assure them that they would be prioritized over new recruits, especially the older hands that have contributed to ground breaking ideas and business success in the past. This also applies to firms that cannot pivot to any other form of model to survive and are having to cease operations. In this instance, employees understand that the business is no longer viable. It should be explained that it is not that a set of skills are being devalued or deprioritized rather a business going concern. However, as mentioned above, this process should be carefully managed, taking into consideration the psychological effects it could have on employees.
B. For companies coping through agile strategies – Address the real issue
Prior to resorting to layoffs, organizations should investigate the root cause of business struggle. Black swan events such as the COVID -19 pandemic can drastically change a business’s outlook; however, the underlying reason for failure is an externality beyond one’s control and not its employees. Then why redirect pressure on the workforce? Of late, business blues has been the result of demand side issues. Hence, retrenching employees, by any means, does not ensure a firm’s longevity, instead it would only call for more and more retrenchment, the longer the pandemic persists. Therefore, companies should simply address the elephant in the room. If business failure is owed to a drop in demand, firms should explore the possibility of new revenue opportunities, either as a solution for the shorter term or longer term. (While this may not be as easy as it sounds, postponing this will eventually result in a continuous decline in revenue and earnings). Check our April issue on how businesses could sustain demand amidst a pandemic.
So, how could agile businesses deploy employees without having to lay them off?
i. Redirect workforce to increase sales– Deploy workforce to restore customer relations, increase access to product via online channels and secure newer markets. Firms could explore possibilities of tying part of remuneration to new business secured. Sharing business risk would incentivize employees to drive business while partial salary reductions would ease cheque burden on the firm.
ii. Reskill them for new products – For firms planning to create new products within its core competence, it could deploy existing talent aided by shadowing a few external experts. It could run a few pilot tests until existing teams are savvy on new product creation and marketing. For developments outside core, where existing set of skills are rendered redundant and the adaptability in the new environment is sparse, intense, fast-tracked training and development is vital including assessments and assignments.
C. For companies that are finding themselves resilient – Optimize workforce capacity
Companies that aren’t switching business models or retreating, rather strengthening existing business to align with new realities should optimize present workforce capacity.
So, how could resilient businesses optimize their workforce?
Take good care of existing employees – Explored in detail in Section 2 below.
Re-imagine the post pandemic workforce – While resilient firms may not have to invest much to manage workforce development for present needs, it is essential to build resilience for the future. This is true for all organizations continuing to operate amidst the pandemic, may they be, agile, retreating or resilient.
i. Adopt flexible working approaches: While lockdowns and restrictions would continue as the norm over the foreseeable future, firms should explore opportunities to increase output through work from home channels. This would help keep employees engaged while also staying safe at home. It is also an ideal solution that can aid with the minimization of firm cost on rental and utility bills while ensuring pre-pandemic level of output. However, firms should not discount the adversity of this approach on employee morale owing to reduced social engagements in office and corridor conversations. It has also had an emotional impact on working parents struggling to balance the home front and work life. Hence, in the more medium term, when restrictions are eased, a hybrid model is encouraged where a combination of work from home and office time is enabled.
A survey of 100 executives found that 90 percent envision a future with some combination of remote and on-site work.
ii. Re-skilling – Firms would need to re-skill to suit new business realities and stay relevant. While some form of immediate training is required for employees in resilient industries (for example, reskilling nurses so that they can keep up with technological advances), businesses would have to strategize what the future business workforce would look like. Equipping employees with social, emotional, advanced cognitive (thinking), digital capabilities, as well as multi-tasking capabilities is essential so that they can cross-work and be resilient to external shocks.
A survey revealed that 69 percent of respondents found building the skills of existing staff to be more important than any other method of talent building, including hiring during the pandemic. (Figure below)
2. How much effort should enterprises invest to take care of existing employees amidst a pandemic?
While some employees have been let go of, the ones that have been retained have had to weather the storm head on. Businesses have had to transfer workloads of a previously larger workforce onto a smaller group or hand over an increased burden to the existing workforce. This has meant that employees who have been fortunate enough to retain their jobs have had to take on much more than before. While this is still a much better predicament to be in, rather than be unemployed, the degree of difficulty some of them have had to face has been intense – with healthcare workers, front-line workers and daily wage earners being among the hardest hit groups. This has demanded for increased intervention by HR and management, especially to ensure continued performance and productivity.
Emotional Wellbeing –
22% of 400 frontline nurses surveyed, providing direct patient care, revealed that they may leave their jobs in the next year, a reflection of the physical and mental strain the pandemic has placed upon the profession.
Physical Wellbeing –
Financial Wellbeing –
As businesses continue to embrace more and more concerns posed by the pandemic, they will need to transform their eco-system of operations to remain future proof. Await our monthly issues next quarter to explore how organizations need to Look Beyond the Pandemic.
COVID-19: Implications for business – McKinsey, June 2021; SME Competitiveness Outlook – International Trade Center, June 2020; Measuring the business value of corporate social impact – Deloitte, July 2020; Layoffs That Don’t Break Your Company – Harvard Business Review, June 2018; Money invested in ESG funds more than doubles in a year – CNBC, February 2021; From CSR to ESG – JDSupra, February 2021; Does ESG Investing Produce Better Stock Returns? – The Motley Fool, May 2019; How Does Investing in ESG Companies Affect Returns? – Morningstar, February 2020; Coronavirus Is Putting Corporate Social Responsibility to the Test – Harvard Business Review, April 2020; ICAO, Uniting Aviation – A UN Specialized agency
Seyeda Mowhiba is a Consultant at Stax and has been with us since 2016. As a holder of ACMA, CGMA, UK and four world awards in Financial Management and Strategy, she has led multiple projects assisting companies across diverse industries on business strategy formulation, process improvement, and financial modeling. Prior to her role at Stax, she worked at Moody’s Analytics and Dilmah.