How to Prepare for a Recession



Introduction

​Michael Lawrence recalls vividly what he was doing in 2008 when the Great Recession hit.

At age 26, he was in his first HR job, working for a Las Vegas casino. He was excited to be training the casino’s 5,000 employees on new guest services standards. In small groups over several months, he was pumping up workers and telling them how great the company was doing.

However, as employees came back for subsequent sessions, they shared troubling news: Some of their co-workers had been laid off, and they feared they would be next. By the time the training ended, a significant portion of the workforce was gone. Then Lawrence and the rest of the four-person HR team were let go. He was in shock.

​"I felt that one day I turned on the news and everything was bad. Over the next three weeks, everything went to hell very quickly,” Lawrence recalls. “It was terrifying at the time.”

Las Vegas was one of the hardest-hit cities in the nation during the recession. Unemployment hit 14.2 percent compared with the national average of 10 percent at the worst point. It wasn’t until 2016 that state economists declared Nevada had regained nearly all of the 175,000 jobs the state lost during the recession. 

As for Lawrence, it took him about four years to get back to the $38,000 annual salary he had been making prior to the downturn. Still, he considers himself luckier than most.

“I narrowly avoided having my life ruined because I did a couple of things right. I had saved some money. I got a severance check. I got unemployment, and I applied for a bunch of jobs. Then, I went and lived in my car and just traveled around for a bit until I found a job,” says Lawrence, who now is senior talent partner at the Las Vegas-based RSD Talent Operations for Cirque du Soleil Entertainment Group.

It might be difficult to think that something like the Great Recession could happen again—especially when many HR teams are working feverishly to fill open positions. Unemployment was at 4 percent in December. Job postings in recent months exceeded the number of unemployed individuals, according to the U.S. Department of Labor. It’s a dramatically different scene from the recession, when there were more than six unemployed people for every job vacancy.

Yet, the time to prepare for a recession is before the storm hits. 

If HR professionals aren’t getting ready now for the next economic downturn, whenever that might be, “then we’re doomed to replicate some of the mistakes of the past,” says Carol Cooley, vice president of talent and culture at HSS, a health care security services provider based in Denver.

Warning Signs

​Trade tensions, stock market volatility and bond market concerns are sending worrisome signals—as is a recent spate of corporate layoffs.

General Motors announced last fall it would lay off more than 14,000 workers in the U.S. and Canada and shut down five plants. Ikea cut 7,500 jobs. Verizon said 10,400 employees would leave under a voluntary separation agreement. While those changes are being made in large part to adjust to shifts in consumer demand, they could also be viewed as a forecast of turbulent times ahead.

Economists and financial experts have been warning for some time that we’re overdue for an economic “correction.” Business cycles typically run every seven or eight years, and the last recession officially ended in June 2009. The current economic expansion, which is in its 10th year, is the second-longest on record.

​Almost half (48.6 percent) of 212 U.S. chief financial officers believe the nation will be in recession by the end of 2019, and 82 percent believe that a recession will begin by late 2020, a presidential election year, according to the findings of a recent Duke University/CFO Global Business Outlook survey.

“The end is near for the near-decade-long burst of global economic growth,” said Duke finance professor John Graham, who is the survey director, when the results were released in December. 

Meanwhile, a group of 53 business economists predicted the risk of recession to be at 20 percent by late 2019, 30 percent by late 2020 and 50 percent in 2021 or later, according to a December report by the National Association of Business Economists (NABE). Trade tensions are seen as the greatest risk to the economy, causing 80 percent of NABE panel forecasters to reduce their 2019 GDP growth outlook.

Plan Ahead

​Whether a downturn is one year away or two, HR professionals should start planning now.

“The most effective way to prepare for a recession is to strengthen the way your business operates today,” says Sarah Meusburger, SHRM-SCP, HR director at Banner Associates Inc., an engineering company in Brookings, S.D. 

“Adopting a culture of continuous improvement is going to help organizational leaders and HR identify opportunities to better align their human capital with overall organizational goals, streamline processes, seize opportunities to grow, learn from the past and focus on the future,” she says. “It’s an intentional and active process of identifying ways to improve the overall effectiveness and efficiency of business operations.” 

​To do this, HR professionals must look critically at staffing levels and organizational structure and encourage creative solutions. Some key questions to ask include: 

• Do we have the right leaders, and are they in the right positions? 
• Is our staff aligned to meet organizational goals? 
• What opportunities do we have to improve or grow the business? 
• How can we best structure our workgroups to achieve optimal results? 
• How can we reduce costs without compromising the quality of our product or service? 
• Can we automate or outsource any functions or processes to drive internal efficiency? 
  

Ultimately, to withstand the challenges of another recession, Meusburger says leaders must be willing to make changes that will benefit the organization in the long term. 

Doing so should include the following actions: 

Study your workforce. A good way to begin is by collecting information about the organization’s workforce that can be used for long-range planning.

“[HR] should be looking at the data, knowing who is where in their careers, who is where in their teams,” Lawrence says. “Are people ready to move into the next position? Are they happy where they are?”

Reduce Expenses

​During the next economic downturn, your organization’s revenues might plummet, and you likely will have to make spending cuts. You can take some pressure off by developing a priority list now. 

Be aware that seemingly simple cost-cutting decisions can have unexpected ramifications, says Tracie Sponenberg, SHRM-SCP, who was HR director for the Concord Monitor newspaper in Concord, N.H., during the Great Recession. 

‘Morale is the first casualty of downsizing. There are tremendous impacts on productivity.’
Wayne Cascio

“What seemed like an easy fix was reducing the cleaning services. What we didn’t expect was that not everyone would take out their own trash. We got mice,” says Sponenberg, who is now senior vice president for human resources at 500-employee The Granite Group, a plumbing and heating supply distributor in Concord. 

Business leaders there have developed a written plan for offsetting declining revenues should economic conditions change, something larger companies have been doing for years. It’s part of their strategic planning process.

“There are lots of things we can cut before we get to people,” she says.

To take a more long-term approach to reducing expenses, consider the following steps:

Review programs and pay practices. Efforts to freeze or reduce wages don’t usually sit well with employees, so Cooley suggests saving money by jettisoning practices that aren’t offering enough return on investment. 

“If you’ve got a rewards and recognition program that costs $200,000 to run, maybe now is the time to allocate those dollars elsewhere so you can find yourself being a much more attractive employer,” she says. 

If you don’t have a retention plan for certain key positions, create one, Meilleur advises. “Who are the people you can’t afford to lose?”

During the 2007-09 recession, his former employer offered retention packages to ensure that critical employees wouldn’t jump ship. The packages might include a bonus, a temporary bump in pay or extra time off. 

​Improve flexibility. Since the last recession, many companies have relied more heavily on independent contractors to help them stay flexible as priorities shift. 

However, contractors can be more difficult to eliminate than you might think, warns Matthew Bidwell, a management professor at the Wharton School of the University of Pennsylvania. While you don’t have to pay contractors severance pay when you let them go, many of these workers are doing essential tasks. 

“Flexibility isn’t just about the kind of contract somebody has,” he says. If you can’t run the company without that person, you’ve lost flexibility. 

Minimize the need for layoffs. By spending more time on long-term workforce planning, HR professionals might be able to reduce the need for layoffs and their long-lasting negative repercussions. In addition to direct costs such as severance pay, layoffs carry substantial indirect costs.

“Morale is the first casualty of downsizing,” says Wayne Cascio, global leadership professor at the University of Colorado at Denver, who has studied the impact of layoffs for decades. 

“There are tremendous impacts on productivity because when people are worried about their jobs, they start surfing the Internet, looking for jobs, getting their resumes up-to-date. There’s that uncertainty of not knowing when the hammer is going to fall and affect you,” Cascio says.

In addition, when companies lay off workers, particularly when they haven’t done it before, they are more likely to experience “unanticipated voluntary turnover” the following year. 

“You start losing some of the best people you’ve got because they’ve got more options in the labor market,” he says.

In the long run, studies show, layoffs don’t improve profits. In fact, a common mistake in downsizing is laying off too many critical workers. When the economy picks up again, companies face enormous expenses in hiring, retraining and rebuilding the knowledge lost, Bidwell says.

So the difficult question organizations’ leaders must answer becomes this: Is this a temporary setback or a permanent structural change to the industry?

If it’s a temporary economic dip, organizations can try alternatives to layoffs such as hiring slowdowns, retraining programs, furloughs or voluntary buyouts, he says. 

​Common Downsizing Mistakes  Organizations identified these actions as detrimental to business health during the Great Recession: Failure to communicate openly and honestly with employees.  Failure to involve employees in developing solutions. Failure to recognize that the downsized company might not have enough people with the right mix of skills needed to grow after the recession was over. Source: Employment Downsizing and Its Alternatives, SHRM Foundation, 2009.

 

Build Trust

​Pat Duncan, SHRM-SCP, went through two layoffs at two different companies in 2008, and she remembers a stark difference in how they were handled. 

At the first company, the chief executive officer met with employees on the manufacturing shop floor and told them that sales were down and layoffs might be coming. He said he felt bad about what was happening. “Nothing was hidden,” she says.

But the second employer held information about pending layoffs close to the vest and didn’t bring in HR until the end. “It was a lot harder because people were surprised,” says Duncan, now a senior consultant at Calyx-Weaver & Associates in Boise, Idaho. “What I learned is that communication is key. Employees don’t like to be kept in the dark.”

​When information isn’t shared, workers will fill in the gaps with speculation, which can be worse than the truth, Meilleur says. What’s more, he adds, is that if employees believe their leaders are being dishonest, morale and productivity plummet. 

A better approach is to share the company’s financial situation with workers and solicit their ideas for cutting costs. In a previous job, Meilleur thought layoffs would be needed. But one worker proposed that they all take a voluntary pay cut instead, and everyone agreed. 

“Six months later, we got additional funding, and we gave everyone a bonus for hanging in and then restored their salaries,” he says. 

Many HR professionals who lost their jobs in the last recession said the experience helped them gain empathy for employees going through tough times. 

Prior to losing her job, Sponenberg thought HR professionals should remain emotionally detached when delivering bad news to workers. Afterward, “I knew I would have these difficult conversations down the road, but I could have them with more sensitivity than I had before.”

When employees are let go, treat them with dignity and respect. 

“Make sure they leave on good terms with as much support as possible,” including outplacement services, says Stefanie Mockler, a consultant with Vantage Leadership Consulting in Chicago. 

Not only will it ease their transition, but employees remaining at the company will feel better, too. Organizations that treat workers poorly will almost certainly face criticism on social media, causing long-term reputational damage, Mockler says.

When the economic storm clears, those organizations that worked to minimize layoffs, build trust and treat employees with compassion will be headed toward a brighter horizon.