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Retrenching then hiring new talent may seem like an attractive strategy in tough times but it has hidden costs. Retention can actually be a cheaper, more effective approach for surviving the recession.

“It seemed like a good idea at the time.”

We’ve all heard that as the punch line of a joke or a story of heroic failure… but these words are not so funny when they apply to a business decision gone wrong. And what could be a mere misstep in good times could prove to be a terminal error in today’s challenging economic environment.

That’s why it is worth really thinking through what appears to be a shrewd strategy for surviving a recession—the idea of laying off marginal or expensive staff members, reorganising, then cherry-picking new hires from the wide variety of cheaper talent now on the market. While the strategy looks good in principle, there are significant direct and indirect costs and risks to your business.

Redundancies aren’t cheap

For a start, the process of making redundancies is expensive. The UK’s Chartered Institute of Personnel and Development (CIPD) estimates that the average direct cost to employers of making redundancies is almost $35,000 per head. This is before factoring in the hidden costs such as higher labour turnover, a fall in staff productivity and the risk of partner and customer attrition—all before we consider the costs of hiring and training new people.

The Australian Centre for Retail Studies (ACRS) at Monash University also cites knowledge drain, plunging employee morale, loss of trust in management and an increase in voluntary turnover as other undesirable side effects of redundancies. Dr. Sean Sands, Research Fellow at the ACRS, published a white paper in April 2009 on redundancy as a management strategy.

“While redundancies may seem like a good way to cut costs in the short-term, the direct and indirect costs of downsizing can paralyse long-term revenue-generating streams,” he wrote. “The indirect costs— like losing experienced sales and marketing employees who have strong relationships with clients—can cause lasting damage to a business.

“Additionally, the direct costs of redundancies negate any financial benefit if new employees are hired within six to 12 months, according to a Bain & Company study…  this type of tactic is common during recessionary periods and can place an organisation in an unfavourable position when the recession comes to a close.”

Recruiting cheaper staff is expensive

Now let’s consider the cost of hiring that hot new talent that is available in the market due to being made redundant by other employers. A rule of thumb is to budget 50-to-200 percent of an employee’s annual salary (depending on level) to recruit and train a new hire.

The cost of hiring new employees includes the following factors plus an additional 10 percent for incidentals:

  • Advertising
  • Bonus signing if applicable
  • Relocation expenses if applicable
  • Time for interviewing
  • Travel expenses
  • Pre-employment assessment
  • Administration of employee induction, salary and benefit set-up, etc.
  • Lost management productivity due to involvement in recruitment.

Direct and indirect training costs include:

  • Training services and materials
  • Plant and machinery downtime if required for training
  • Employee time away from the job spent in training
  • Additional working hours required of managers and colleagues until new employee can put training into practice on the job.

Retention will work better

For a company whose very survival is threatened, retrenchment may indeed be the way to go. But if your company is not moving into its terminal stages, then I advocate retention—along with retraining if necessary—as a cheaper, more effective strategy.

Retention does not mean you are stuck with burdensome overheads. There are a lot of cost-cutting moves you can make without directly impacting your existing staff. These include:

  • Negotiating cheaper rates and more favourable terms with suppliers who will be keen to keep your business
  • Considering new suppliers where existing relationships can’t be improved
  • Freezing capital expenditure
  • Freezing recruitment—either entirely, or restricting hiring to the back-filling of key vacant positions
  • Postponing business development projects that won’t deliver return on investment over the shorter term
  • Reducing accumulated annual leave when business is quiet.

How about a four-day week?

Salary freezes and pay cuts—especially at senior levels—must also be considered, but again there are other options that you could look at first. Just about everyone is time-poor nowadays, and many employees complain about not having enough time for families, friends and personal interests—therefore the offer of voluntary four-day weeks or nine-day fortnights might be well-received.

And don’t forget that people appreciate having choices, even if they are unpalatable ones. So the offer could be a reduced work week or a straight percentage pay cut. At least with a reduced work week, there is some value to both the employer and the employee.

In cases where redundancy really is necessary, or there is natural attrition, consider covering the needs of your business by redeploying and retraining an employee from another area. Again, this can be a win-win proposition—the employee gains job security and development, and the employer can avoid or postpone the needs for expensive recruitment. And additional benefits include the maintenance of employee morale and respect for management, and the retention of the company’s knowledge assets—those carried between the ears of skilled and experienced employees.

Consider the long-term

Even if you have to cut employees or whole departments loose, consider the long-term impact on your business and the huge loss of skills and knowledge. Look for a creative solution—for example, can an individual or department be separated from the company, but helped to set up business as a supplier or consultant to your firm? That way you retain their know-how, and even their relationships with customers and suppliers—but without the overheads of having them on staff. This arrangement can also give the employees a new career path and financial security that they could not achieve by remaining in their old jobs.

In fact, instead of viewing employees as cost centres on legs it is also wise to enlist them as your allies in the fight to cut costs. After all, they actually work on the front lines of your business so they should be able to make suggestions on how to improve efficiency.

And when thinking about retention, don’t forget it applies to customers as well as employees. It won’t help you to cut costs if your total business is shrinking due to customer attrition. It is critical to retain existing customers and fuel growth by finding new ones. This is perhaps the most important reason for retaining skilled and experienced employees—they will drive your organic and new business growth, and in that way secure the future of your company.

—Jody Lennon is the CEO of Kinetics Pty Ltd (www.kinetics.com.au), a public relations and marketing communications agency that serves B2B and B2C clients in the technology industry and related sectors.

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