In this series, we’ve been looking for a few bits of wisdom gained from the challenges of the great recession — all the more timely since the future is still looking uncertain.  From Part One and Part Two, we now know that some cost cutting actions used to survive the recession were much riskier than others, in terms of their effects on employee alignment, capabilities and engagement (ACE).  And in a case of “no good deed goes unpunished” if you try to avoid cutting people or pay by cutting back on service to customers, you may actually cause more damage to ACE than if you had a round of lay-offs or reduced compensation!

Each of the tactics for managing through an economic downturn described in Parts 1 and 2 can be considered reductive, if not outright destructive in their fundamental nature.  Leaders may choose to think of them as “pruning now for future growth,??? but that does not change the fact that such pruning has serious repercussions for employees and the customers they serve.

BricksCost-cutting that Reinforces Engagement

In our study of 2,000 companies, we found one strategy that did not fit the mold.  One strategy that cut costs and actually improved alignment, capabilities and engagement.

The one tactic that had a positive impact on ACE?  Identifying process changes to reduce costs.  Companies using this tactic found a strong positive impact on alignment and engagement, and a moderate positive impact on capabilities.  This tactic likely maintains consistency with pre-existing goals.  Thus looking within the organization to collaboratively make improvements and reduce costs actually increases alignment.  For employees, it represents the company choosing surgery over amputation.  Not surprisingly, this path can actually lead to higher levels of engagement.  Employees are highly attuned to organizational behavior that values people and that recognizes their ability to help a company prevail in challenging times.  And chances are, the stated values of the organization are much more in line with this approach than any of the other cost-cutting techniques.  There is a lesson here for every organization facing a difficult future. 

However, this is not a tactic that should be limited to the production side of the business.  If you are in HR, IT, Finance, or other shared services there are techniques now available to support intelligent cost reduction by focusing on both demand-side and supply-side waste, such as Functional Lean.  Applying tools like Functional Lean underscores that everyone is in the same boat, and we all have to work together to survive — you can’t just count on shop floor lean six-sigma to save the day.

Lesson #3:  Live those corporate values.  Treat those “most valuable assets” as if they really are just that.  Tap into the wealth of knowledge they have to drive cost out of your systems.  It may not be as fast as pink slips, but in the long run it will absolutely serve your organization better.

RecessionTactics Impact on ACE

  *adapted from my article in the April issue of Quality Progress.

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by Jerry Seibert | Categories: Engagement, People Equity | Comments Off

With the economy giving very mixed signals again, this seems like a good time look back and see what some of hard-earned lessons from the last few years were.  In Part 1 we shared our finding that if you have to cut expenses fast, and you want to minimize the effect on employee alignment, capabilities and engagement (ACE), chopping pay is better than chopping people.  And the least damaging way to chop pay is the mandatory furlough. 

There are more options than slash and burn, however.  ?? Some responses to the downturn were less extreme than such direct tactics.  What we found in studying over 2,000 companies, however, was that less direct can actually mean more insidious when it comes to keeping an aligned, capable and engaged workforce.

The Link Between Customer Risk and Employee Risk

dominosWe discovered that greatest negative impact on ACE did not come from eliminating people or reducing compensation.  Surprisingly, the most powerful negative effects occurred when companies chose to reduce service levels to customers and when they made changes that reduced services internally, between departments.  Reducing services to customers had a strong negative impact on alignment and engagement.  It would seem that employees see a serious disconnect between oft-repeated strategies and mission statements that emphasize customer service, and actions that may damage customer relationships, if not harm the customers themselves.  It is no shock that aspects of engagement such as advocacy (willingness to recommend the company) and discretionary effort might also decline in such a context.  A lesser effect was observed for capabilities, which may mean that employees realize that the capabilities for good service remain in place; they are just being underutilized.

I have to say that I was perversely encouraged by these findings.  It says something positive — maybe even a little defiant – about employees’ commitment to the customer.

When companies reduced services between departments (internal customer service), there was a strong impact on all three ACE factors.  Changes which imperil a department’s ability to service other internal groups would logically lead to lower perceptions of capabilities.  And internal service breakdowns often lead to failures with customers.  Employees may feel less certain that they are on the same strategic page as senior leadership, thus lessening alignment.  The strong impact on engagement is a little more puzzling.  Perhaps, it is in part a reaction to being placed in a situation where, as an employee, one is prevented from doing the best work possible, resulting in a certain degree of cognitive dissonance.  Or perhaps it flows from frustration with a lack of support from other parts of the organization.

Lesson #2.  The biggest risk to employee alignment, capabilities and engagement is not be the most obvious.  If you use service cuts in a downturn to save money, you may inadvertently be driving down ACE far more than you would expect.  No one comes to work wanting to do a poor job.  But if you put people in a position where they can’t deliver the same level of performance as before, then ACE will suffer greatly. 

Next time: the strategy of first resort.

*adapted from my article in the April issue of Quality Progress.

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During the recession, did your company drive down employee engagement, or build it up?

Common wisdom has it that the steps companies typically take to manage an economic downturn have an across-the-board negative impact on employee morale. But in a study of over 2,000 companies, we found that there are big differences between the various recession tactics that companies utilized and the impact of those actions on the critical People Equity factors of employee Alignment, Capabilities and Engagement (ACE).

The latest economic data indicates the pace of the recovery may be slowing, and a double dip recession is still possible.  So this seems like a good time to look back and see what we learned during the hard times just past.

So, first off, yes, lay-offs, budget cuts and hiring freezes all had a negative impact on A, C and E.  These actions, which include the most severe responses to the recession, can leave the remaining employees feeling they now have to carry a heavier load, with no additional recognition.  With fewer resources, capabilities decline.  The perceived inequity of these tactics weakens engagement.  Implementing resource reductions also can lead to a value disconnect between employees and their company, thereby undermining alignment.   Employees find it difficult to be in sync with the strategic direction of the company when those around them are losing their jobs.

But what about more targeted strategies?

It turns out that the effects of compensation-oriented tactics were very different.  Pay cuts, pay freezes and benefit reductions did have a negative impact on employee engagement. This should come as no surprise.  But compensation cuts had no significant impact on alignment or capabilities.  It is possible that these actions, while not welcomed, are more likely to be viewed as rational and acceptable – sharing the pain through lower profits for the company and lower rewards for staff.  Thus, alignment may be maintained, and with resources preserved in the organization, capabilities remain largely intact.

But even among compensation cuts, not all strategies are created equal.  Furloughs are typically used to cut pay by cutting total work hours.  Like the other techniques, use of furloughs had no impact on alignment and capabilities.  But neither did furloughs affect engagement.  Perhaps that is because unlike the other actions, a furlough may be viewed as somewhat more equitable – you do not get paid, but neither are you required to work during the furlough.

Lesson #1. Pay cuts are less damaging than lay-offs, and furloughs are the least onerous method of pay cuts. Obvious, you say? The millions of Americans let go during the recession (rather than furloughed) probably wish it had been more obvious to their companies.

UPDATE (Aug. 9). Interesting comments by Wayne Cascio (U. of Colorado) on NPR today: Research finds that companies making extreme job cuts (>20%) in recessions see a short term profitability boost but then lag their peers for up to 9 years post-recession.

Next time: the biggest risk to ACE is not what you thought.

*adapted from my article in the April issue of Quality Progress

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