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A recent survey found that 90% of U.S. CEOs expect an economic recession, shifting business leaders’ attention from finding and hiring workers to right-sizing for an period of lower growth.
While economic cycles are not anything new, the current environment feels very different than the last downturn. The pandemic’s lasting impact, along with a few macro trends that are driving greater unpredictability, is challenging corporate leaders to think differently about their response as leaders. Research in the aftermath of past recessions has clearly demonstrated that the businesses that appropriately balance defense and offense fare best in the long term; this is particularly relevant when considering layoffs and talent decisions.
For leaders making decisions about if, when, and how far to downsize, here are some unique and inter-related considerations for the current environment:
1. Evaluate the organization’s experience from the tight labor market: Many businesses have struggled to hire the right talent in the past few years. In many cases, some businesses are still understaffed with unfilled positions, others have invested significantly in upskilling and developing their existing talent, and still others have found their growth restricted by the inability to hire. The memory and lessons from this challenge are likely to make many leaders hesitate to move quickly on any layoffs — especially in industries that have traditionally struggled to hire or struggled to retain talent.
This is not to suggest that layoffs can or should be entirely avoided, but leaders need to be far more intentional about where and why they downsize. Broad-based layoffs run the risk of severely impairing the business’s ability to operate and grow, since building back the talent pool is likely to be far more difficult than it has been in previous recessions. Analyzing the trends of the past few years can provide insights into which areas of the business are worth running overcapacity in the short term in service of future growth.
2. Spotlight flexibility even at the expense of efficiency: The supply chain constraints experienced since the pandemic have highlighted the challenges with sacrificing flexibility in the search of greater efficiency. The drive for better margins has left many businesses with little ability to absorb a supply shock. All evidence points to an environment of continued uncertainty — with supply chains still not fully recovered, the war in Ukraine, the threat of further pandemics and the continued impact of technology and AI. Before making decisions on removing capacity (people or otherwise), leaders need to do scenario planning and understand what assumptions are driving their decision making.
3. Appreciate the limitations of long-term planning: The practice of developing five- year strategic plans is increasingly outdated. What is needed nowadays is not detailed, long-term planning but rather a focus on the scenarios that might come to pass and shorter-term plans that can pivot and change when underlying assumptions change. A long-term view of business success is still critical, but leaders should recognize the path to business goals will not be a straight line and will need resets and adjustments. This is also true of long-term resource planning.
Create agility in the workforce by employing strategies such as part-time work, contract work, more variable compensation and greater cross-training, allowing leaders to pivot their workforce plans quickly when the context changes. Hybrid work environments create opportunity for these agile work models by developing a larger pool of potential employees and employers (not restricted by geography) and a greater ability to structure part-time work to meet individual’s needs.
4. Encourage local decision-making: While the economic downturn is likely to be felt globally, the specifics of individual markets will be quite different. To avoid making decisions that may be appropriate for one region but not for another, leaders will benefit from more disperse decision-making. In difficult times the instinct for leaders is often to make centralized decisions. This approach may be effective at handling situations where information is complete or, at least, the process for collecting information is known. A small, elite group of senior managers can then analyze this information, make good decisions and communicate these decisions to the rest of the organization.
In rapidly evolving and highly uncertain situations, reliance on such a small group is no longer feasible. No leadership team, no matter how sophisticated, well-connected or intelligent will be able to gather information and insights quickly enough. To make good resource decisions, it is important to have a local picture of how customers are responding, market demand is evolving, supply chains are adapting and government policy is changing. Rather than relying on a top-down mandate to, for example, reduce workforce by 10%, leaders should use a bottom-up approach to understand what is needed in each region/area of the business.
As central banks and governments continue to tweak monetary- and fiscal policy and businesses start to make proactive changes, economic uncertainty is likely to increase. In these situations, there is a tendency to move in a herd because clarity is hard to find. No leader wants to be caught being slow to act, which can lead to reactive decisions on when and how much to downsize.
In the short term the markets generally reward fast- and deep cuts, making it hard for leaders to resist taking reactive moves. Leaders can improve their decisions by acknowledging and accounting for the level of uncertainty in the current environment, being flexibe, exploring new staffing models to create greater agility and resisting the urge to make centralized, non-consultative decisions.
Gaurav Gupta is a director at change-management firm Kotter.
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