The top error firms make in a downturn

Before the recent round of Budget 2016 discussions even opened, analysts cut their GDP growth forecasts for Singapore's economy to 1.9 per cent from 2.2 per cent. While that is consistent with the Ministry of Trade and Industry's (MTI) forecast range of 1-3 per cent growth, if this is realised, it would be Singapore's weakest rate of annual growth since 2009.

Struggling housing demand, weak Chinese demand and a net negative impact on the global economy from low oil prices have made an unappealing prognosis for 2016.

These factors and others are driving the highest levels of layoffs in Singapore since the global financial crisis of 2008-2009. In anticipation of the impending bloodbath, companies are tightening headcount, and the trend of the slowest employment growth in 12 years seems to be continuing.

With such strong headwinds, staff in many companies may be forgiven for deciding that they should just hunker down, get their work done, and count their blessings for still holding on to a job. In the prevailing environment, perhaps they would be right. Some bosses may latch onto this sentiment and pile on the pressure on their staff. That would be a grave mistake.

There isn't much each individual leader or manager can do about the overall economic conditions. But there are things they can do to protect their companies, their employees, and themselves. In the best of times, studies have found that successfully engaged teams were up to 22 per cent more productive, had 25 per cent less voluntary turnover, and were 21 per cent more profitable than disengaged teams.

When the economic environment is uncertain, even without the possibility of retrenchment, there are significant psychological stressors on staff. In a study done on 10,000 "followers" (staff who reported to leaders), there were four basic needs identified: Trust, Hope, Compassion, and Stability.

Each individual manager has a disproportionate impact on his or her staff's needs along these four dimensions. When taken together as a company, fulfilling these needs and creating engagement has significant bearing on financial performance. Studying companies in economic turmoil, Harter et al found that highly engaged organisations saw 2.6 times more growth in earnings per share (EPS) than average organisations. Also, the EPS of the most engaged companies outpaced that of the least engaged companies by 18 per cent.

Peter Capelli, director of the Centre for Human Resources at The Wharton School, makes the case that the first thing that needs to be done in a recession is to address perceptions about the downturn. Besides addressing one of the four needs of followers, Trust, this action pre-empts negative speculation about possible downsizing activity, pay freezes, and others.

Being transparent about how the company is doing, what the forecasts look like, and what it means to the team, can sometimes be scary. It is hard to predict how your staff will take this information, and if some of it is sensitive, the possibility of information leaks is always present. Nevertheless, the costs of not being transparent and building trust can be even greater: Ben Horowitz, co-founder of Andreessen Horowitz, one of the most influential Silicon Valley venture capital firms, makes this case in great detail in his book.

PLUMBING BEFORE POETRY

While addressing perceptions and building trust is a first and important step, to get the "plumbing" of the culture right would also involve showing Compassion and introducing Stability.

Bad things happen to employees in the troughs of a company's business cycle. Being open about this fact allows a dialogue about what the company, and individual managers, are doing to help those who are affected. Allowing staff who need to leave to do so with dignity, and with due recognition of their contributions to the company up to that point, helps demonstrate compassion to those who do stay. If there is any time for managers to show they care, this is it.

Putting together a clear business strategy for navigating the turmoil, and communicating that in a way that can be understood, provides stability. Showing vulnerability - for instance, in admitting that (as a leader) there are things about the market that are still unknown, or that there may be changes in the action plan to deal with changing market circumstances - ironically allows a leader to gain more respect from his or her team and instill a sense of stability.

Once the plumbing has been fixed, the "poetry" of creating Hope even in dire circumstances is the hallmark of good leaders. Deliberately and sensitively creating stretch assignments for staff who remain, all the while communicating the reason these assignments have been chosen for their development, is one way of helping staff make sense of their experience and at the same time feel that their manager cares for their development. Prof Capelli mentions that these assignments shouldn't overwhelm, and should build on tasks already mastered or at least attempted in the past. Once these staff start performing in these stretch assignments, it is important to have them fairly rewarded, and as soon as practicable upon the delivery of results.

"People feel there's too little reward for their discretionary efforts," Rebecca Ray, executive vice-president for human capital and engagement research at The Conference Board, comments. "Most workers today have seen co-workers or family members get laid off, and have also had their benefits cut and bonuses frozen. All this just makes people focus on their survival."

In difficult business environments, companies have to stick to the principle of fair reward to avoid undermining the hard work put in to build the foundations of trust with their staff. This has the significant side benefit of providing the psychological freedom for staff to give their best effort, secure that the company will reward them accordingly when the time comes.

Allowing something as controllable as staff engagement to dip during harsh business conditions removes from companies one of the key levers of resilience and the ability to rebound once conditions improve. Moreover, if good talent leaves in bad times because it has lost its faith in leadership, the pace at which the company recovers could be significantly reduced. Hiring, onboarding, and ramping new staff up to high productivity carries risks and direct costs, creating additional drag. Wouldn't it be simpler, and much cheaper, if leaders just engaged their staff from the beginning?

This article was first published on April 27, 2016.
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