17/12/2008 - 22:00

Employers walk tightrope with staff cuts

17/12/2008 - 22:00


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I WAS pleasantly surprised to see a job vacancy advertised in the window of a restaurant last week.

I WAS pleasantly surprised to see a job vacancy advertised in the window of a restaurant last week.

Was this a business not yet caught by the downturn, or had it simply left the sign there by accident?

Last year, hundreds of such notices could be spotted in the windows of shops throughout Western Australia. I doubt there are many left right now.

The sudden turnaround in the labour market has been so violent that it has probably given economists whiplash. Somewhere between September, when unemployment in WA reached 2.8 per cent, and November, when that figure was released, the market changed dramatically.

Big resources employers went from a hire-at-all-costs mentality to shedding staff almost overnight. It is a remarkable thing.

There are few areas unaffected by this sentiment, though it's most obvious in the mining, mining services and financial services areas.

Consulting engineers have slipped past redeployment to lay-offs, while miners at all levels are cutting production, mothballing operations and putting expansions on hold.

The financial services sector is being hit by the massive deleveraging going on, the fear of stock market exposure and, coincidentally, some pre-downturn rationalisation such as that at St George Bank before the takeover by Westpac.

Retailers are finding it ugly, too, though many will keep the doors open and staffing up as best they can during the silly season, in the hope that all that stock ordered in better times (when the Australian dollar was much stronger) will sell in the government's $10.4 billion pre-Christmas splurge.

After that, I'd expect to see lay-offs or big reductions in hours across that sector, too.

Some of this is natural. Marginal mines can't be expected to operate when prices plummet, or when customers simply don't want the ore.

Engineers aren't needed if there's nothing to build. Bankers are somewhat superfluous when lending ceases. Shops don't need staff if no-one is buying.

But beware the overreaction.

There is a huge cost to shedding staff that should not be overlooked, especially in a market like WA where the long-term view is one of at least another decade of strong growth.

After a long battle with generation Y and a few similarly transient members of the X and Boomer cohorts, employers are undoubtedly fatigued by the huge human resources struggle to attract and retain staff. There could even be some joy out there in employer-land that the boot is on the other foot.

Suddenly those who demanded daily foot massages and seemed to work four-day fortnights face the prospect of having themselves blackmailed on conditions of employment.

Again, I agree that in more than a few cases bosses have the right to be winding back the pandering and expecting a decent day's work.

There is also the opportunity to get rid of dead wood; people who didn't fit for whatever reason yet were hired or retained because businesses were desperate for anyone to fill the vacancies they had.

However, employers ought to think hard about the longer term before they burn all the goodwill they have paid so heavily to generate by either cutting staff en masse or too harshly doling out pain to employees they deem to have had it too good for too long.

I am not in the forecasting game, but downturns and recessions have historically become shorter and shorter. Bargain hunters and huge weight of automated superannuation funds have ensured that the troughs are narrower than ever before.

Therefore, employers could find themselves needing to hire again before too long.

The worst at this game are the public companies.

One of the quirks of accounting and remuneration pay packets is that new CEOs find it attractive to cut costs and make big write-offs at the start of their tenancy.

This sometimes makes it easier for them to win bonuses by starting with the bar set at its lowest.

In doing so they often cut without apparent regard for the culture and stability of the business. Older, higher-salaried workers are shed while younger, lower-cost employees retained. This may seem like renewal (creating opportunities for energetic young employees) but the signals it sends are caustic.

The young know they are retained because they are cheap. They also know they could be on the scrap heap next time around. Exit loyalty, an attribute most needed when profitability returns.

And as I mentioned previously, what of the cost?

Certainly, salaries are saved, but this comes with three very big expenses. Firstly, long-term employees often come with a big redundancy cost - sometimes a year or more in salary.

Secondly, there is the cost of hiring someone new when the market bounces back. This is not cheap. Estimates start at $30,000 and escalate quickly in terms of recruitment, training and management during the first six months of taking on a senior new employee. That hiring process can be all the more difficult if the employer has burned its reputation as a place to work by over-reacting during the downturn.

There is also the issue of the cost when experience is jettisoned. My experience of observing this is that not only do companies sacrifice internally by cutting a good-performing, long-term staffer, but their knowledge of the market can often be readily turned into new competition when the market improves.

I know countless examples of people made redundant who have bounced back to take advantage of their unexpected circumstances, using their knowledge and connections to start a low-cost competitor to their former employer. Often the only thing that held them back before was their risk-averse nature.

From what you have read above, you can see I understand that cutting staff in some cases is vital for survival and, in many cases, is simply good business.

But indiscriminate cutbacks may be simply shifting bigger problems to the future and weakening the organisation at the worst possible time. If the downturn is short and sharp, as many expect, the cost of cutting may well outweigh the savings.

And finally, I'd like to wish all WA Business News readers and their families a peaceful, relaxing and happy holiday season.


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