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Take advantage of the current crisis

HR in economic cycles

The economy evolves in regular cycles which companies should consider in their long-term planning and adjust their activities accordingly. Times of prosperity and boom are followed by economic slowdown and recession. When enjoying prosperity it is good to get ready for future decline, stabilise revenues and keep cutting operational costs. When recession comes it is necessary to alleviate negative impacts by taking advantage of strategic opportunities, adjust the corporate business model to the new circumstances and particularly retain and motivate talented and key employees who, as a result, will mean a competitive edge and drive value when the boom comes again. When facing recession most companies focus only on short-term and medium-term activities neglecting long-term opportunities which would allow them to improve corporate performance more significantly. Although the period of recession and crisis is unpleasant, it is an opportunity to think about efficiency, cost reductions and elimination of activities adding insufficient value to the company.

HR in Economic Cycles

The economic crisis and the HR department

While in the past corporate downsizing and cost cutting were topics limited to companies which were unable to position their products on the market or faced crisis due to other reasons, in the last few months most companies have considered these measures either for preventive or "rescue" purposes. Some companies have already started to downsize, others are planning to follow suit sooner or later.

In January 2009 the unemployment index reached 6.5%, in the first quarter of 2009 the unemployment raised to 7% and according to analysts, it will continue to increase up to 8-10% in 2010.

At this time HR may not act only as an enforcer of "unpopular decisions" but, taking advantage of the crisis and recession, assume a more strategic role than it had before.

The HR Department is usually the first place for the company management to stop when seeking additional and immediate savings while facing economic downturn. Quick cost reduction opportunities include suspending various employee benefits and contributions, cancelling corporate social events and downsizing.

This fact is proved by a Deloitte survey (Managing Talent in Turbulent Economy — Navigating a Course through rough waters), conduced in January and March 2009 in the USA. The chart below compares areas of focus of 391 global companies. The results of the survey show that companies focused on cost-cutting in the area of restructuring jobs, headcount reduction. Later, the focus shifted towards salary reduction, promoting early retirement and retirement contribution reduction.

Reduction decision - graph

Indeed, a number of companies have already taken this direction. Yet it is necessary to be aware of the medium-term and long-term effect of these steps as well as potential risk if ill-considered measures are taken.

This is the right time for HR to take the opportunity to become a genuine strategic business partner. HR has a unique chance to show and use their knowledge of employees and their key qualities but also of the retention tools and measures. Indeed, these key employees can help the company cope with economic, financial, production, organisational and other challenges of the current and coming times, preparing the company for future growth. The economic cycle has not stopped for good, the economy will grow again.

Are HR managers ready for a changed role?

In the past few years, HR managers have made efforts to get rid of the "service function" label, hence becoming a strategic partner of the company management. HR departments have sought to convince the company management that their role in the company is or should be of greater value than mere employee data administration and servicing of employee cycle from workforce planning, recruitment, development, evaluation and remuneration to terminations. Who else in the company should be capable of answering basic questions such as "where and how do we acquire qualified staff; how do we prevent high employee turnover; how do we retain key workforce segments; and how do we approach underperforming employees?".

As the downturn continues, companies are forced to continue with cost-cutting activities. Further headcount reduction waves cut deeper into organizations and selection is more difficult to make. Are HR managers able to provide relevant data and information to managers who make decisions on who to release from the company? Even very experienced employees with the capabilities and skills needed who are in key positions, are at stake. Not only skills and performance but also the role necessity forms the basic factors for headcount reduction decisions. The results of the Deloitte survey indicate a change in criteria used to assess the employees. At the beginning of the year, managers made final decisions based on the role necessity; however, later they focused as well on the tenure in organization, compensation level and promotion potential.

Top criteria - graph

What areas to focus on?

It is important to offer the top management not only a quick but also a well-thought-out solution. In looking for savings potential it is important to consider not only cost cutting opportunities but also ways to increase overall corporate efficiency to manage workforce including their performance and motivation particularly in time of downsizing, and how to optimise cooperation with employees so as to help the company to achieve its strategic goals under adverse economic conditions.

Hence, in planning your HR priorities and activities, consider them in the context of their direction, benefits and timeline as illustrated below.

HR solutions

The following table provides examples of activities which the HR department should address under short-term, medium-term and long-term objectives.

Short-term activities aimed at reducing internal and external costs
Timing: up to 3 months
Corporate performance improvement: up to 10 percent
Identification of personal costs savings potential
Do you spend too much on salaries and benefits without getting back the required return such as performance or motivation? 
  • Analyse and optimise personnel costs and identify savings potential.
  • Define your rewarding and motivation strategy for individual employee segments — define what you want to reward them for.
  • Evaluate how demanding individual positions are and establish adequate salary grades.
  • This will allow you to monitor remuneration on individual positions transparently and benchmark it against salary grades on the market.
  • Use performance-based rewarding system aligned with performance evaluation in a transparent way.
  • Identify activities which you are able to cover by, for example, part-time work.
  • Identify whether your benefits portfolio is well-established; evaluate the efficiency and adequacy of benefits and focus on their tax optimisation.
Analysis and optimisation of training and development cost
Is your spending on training and development efficient?
  • Analyse training and development costs.
  • Focus on the benefits of training and development activities and their alignment with the needs of the company.
  • Think about skills and capabilities required from key and other employees.
  • Diversify education for individual positions and employees so as to educate them in those areas which are important for the company.
  • Focus on alternative methods of development (internal training rather than external training, coaching and mentoring by experienced colleagues, internal work groups and project teams, etc.), possibly on alternative sources used to fund training/development activities.
  • Do not forget to align your training activities with other HR processes in the company such as evaluation and measurements of return on the development investment.
Analysis and optimisation of HR services providers costs
Do you provide HR services internally or do you outsource certain HR services such as payroll, recruitment, etc.? Are these services efficient?
  • Identify costs of individual HR processes and benchmark it against the fees of external HR service providers.
  • Assess the efficiency of these processes and propose measures to optimise costs.
  • Consider all advantages and disadvantages of HR services outsourcing; focus mainly on the administrative burden associated with them, possible risk on the part of the supplier, and define your savings expectations.
Medium-term activities to streamline processes and infrastructure and optimise internal sources
Timing: up to 6 months
Corporate performance improvement: 10–20 percent
Process and organizational optimization of HR
Does your HR department provide high-quality and efficient HR services? Is your HR team able to cover all requirements by top management, line managers and regular employees?
  • Optimise you HR department in terms of its processes and organisation.
  • Focus on the utilisation of individual positions within the HR department and on individual processes in terms of their efficiency.
  • Benchmark the available work pool allocated to individual processes against indicators relating to the organisational structure, employee headcount, services provided and activities of peers.
  • Identify bottlenecks or improvement opportunities.
  • Propose or optimise indicators (KPIs) to measure the performance of individual HR processes, and principles of the motivation system applicable to HR employees.
HR information system optimisation
Do you use your HR information system (HRIS) efficiently? Do you really use all the functionalities you are paying for? 
  • Focus on optimising your HRIS and carry out a cost analysis.
  • Analyse all HR activities and assess whether you can support them or decrease their number by using functionality available in your HRIS modules.
  • Verify whether employee personal data are part of the centralised database and whether HRIS is interlinked to other modules within the company such as financial or assets modules, etc.
  • Verify how HR employees work with HRIS, and whether they are sufficiently trained in all procured modules and how they use them.
Optimisation of total rewards and review of the employee performance management system
How is corporate performance aligned with employee performance and their remuneration? Is the remuneration system fair, competitive and truly motivating?
  • Optimise total rewards.
  • Review the performance management system so as to be able to distinguish employees whose performance is average, under-average and above-average, and use it as a basis of their remuneration.
  • A well-established process of determining objectives and performance measures and their subsequent evaluation up to the level of individual employees provides the company with key input data for other HR processes such as remuneration, career management, workforce planning or training and development. Thanks to the performance management system it is possible to increase efficiency of both funds and human resources allocated to most of the activities and processes performed by the company.
Increasing sales teams efficiency
Are your sales teams efficient? Do your sales people have appropriate skills? Does your sales team report high employee turnover? Are your sales people sufficiently motivated? 
  • Focus on improving the efficiency of your sales teams by optimising the sales process and organisational structure of the sales network, and by optimising the sales people's remuneration and motivation system and the development and training system covering the sales area.
How does your company approach employee downsizing? 
  • If downsizing is inevitable, use outplacement programmes and help employees cope with their difficult situation. By doing so, you will promote the positive image of your company to other employees and strengthen their confidence in the company.
Long-term transformation activities aimed at increasing efficiency and updating the corporate strategy
Timing: approximately 1 year
Company performance improvement: more than 20 percent
Key workforce segments management and motivation
Do you think about growth opportunities of your company? Do you have enough skilled people who will help you grow? Are other companies wooing away your key employees?
  • Identify employees with high potential at all organisational levels and key employees whose skills are hard or very expensive to replace.
  • Focus on these particular groups of employees and find out what motivates them to deliver high performance and stay with your company.
  • Adjust motivation programmes for these key employees; your return on this investment will be the ability to more quickly overcome the crisis and successfully start a new economic cycle.
HR Strategy
Is your HR strategy aligned with the corporate strategy? Are your HR processes effective? Aren't your managers burdened with HR administration?
  • Review or design a new HR strategy in cooperation with other managers, which will reflect your business needs and be aligned with long-term corporate objectives.
  • Analyse your HR processes and propose their redesign so as to make HR activities more efficient and devote saved time to projects which HR managers see as priorities.
  • Think about whether you provide managers with value-adding services or whether all you provide is administrative support.
Leadership development
Do your managers have sufficient managerial skills? How do they manage their subordinates, projects and costs?
  • Keep or restructure your budgets for development activities; while you will be under pressure in this respect, it is highly desirable to convince the management that firms will struggle for talent on the labour market and thus the company is not in the position to stop developing its employees.
  • Review your training and development system so as to develop those skills of employees which are really needed by the company.
  • Introduce the system of differentiated development; focus on individual development activities such as mentoring and coaching for selected employees who are good prospects for the company in the long term.
Talent management and workforce planning
Do your key employees leave the company? What is your demographical situation like? Will your qualified staff retire in the near future? 
  • Introduce a workforce planning system and talent management program.
  • Consider up front possible departures of your employees and their potential replacements.
  • Identify successors internally or start looking around on the labour market well ahead of time. There will never be enough skilled people with high potential and their numbers will keep decreasing due to the current demographical situation. This is a good time to recruit high-quality candidates.
  • At the same time, use your time to develop your current employees who will help you, together with new hires, to lead the company out of the crisis and increase its chances for fast economic growth in the coming period.
Corporate culture
What is your corporate culture like? How do you keep your employees informed and how do you introduce key changes to them?
  • Build a strong corporate culture as a key "link" between employees and the company and as an important retention factor.
  • Strengthen internal communication.
  • Design a communication plan for the coming period; revise it in cooperation with the company management to reflect the latest developments in the company; organise regular meetings with employees and inform them of the company's latest results and development.
  • Use other communication channels to inform employees like leaflets, boards, opinion leaders in the company, etc.

If you are interested in further information and/or our experience with concrete projects or should you be interested in our Free professional consultation (30-60 min) to discuss HR issues, please contact any of our managers.

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