Workforce Planning Makes for a Smarter Reduction in Force

The economic crisis has organizations in a race to cut costs, which includes a major reduction in force. I have wondered about the handling of the reduction in the workforce and how it fits with concepts of strategic workforce planning.

Background and Level-setting on Strategic Workforce Planning

Strategic workforce planning is a process where scenarios are created based on the three to five year (or longer) business strategy, translated into a workforce "demand" (quantity by role/level/skill set/competency) and compared to a forecasted workforce "supply" (based on rates of termination/retirement and current skills/competencies). The difference in the demand and the supply is the "gap." This is calculated for each future year, and specific plans are created to address the gap—most common being efforts to find the new talent while slowing the reduction in the current "supply." Occasionally, the strategic workforce planning results in a need to modify business strategy to bring the workforce "demand" into the realm of the achievable (e.g., not enough internal/external talent to staff a proposed expansion).

Strategic workforce planning is a process that is more akin to financial planning than any other HR processes—which is why it is often most successful when it is done with the business units (not from central HR). At higher levels of sophistication, strategic workforce planning includes financial modeling on the various costs of the various strategies for closing the gaps.

It is not applied everywhere. Strategic workforce planning is most often done on a limited number of roles within an organization. Criteria for applying strategic workforce planning to a role (e.g., engineers, actuaries, nurses, etc.) might be those roles with a high cost-to-hire, roles with a long learning curve or those roles that are "pivotal" to the business (where a vacancy is disproportionately disruptive to the operations/profitability of the business).

"Roles" are not people; they are groups of jobs or job codes. If the names of individuals are in your plan, it is probably a succession plan or destination plan. Both of these are highly valuable, but they are not strategic workforce planning.

Strategic Workforce Planning and the Reduction in Force

Where strategic workforce planning is in place, reductions in force are what one would expect them to be: a crisis situation that requires immediate adjustment to a strategic plan. This is not different than the way business strategy is changed to reflect the sudden appearance of an unexpected situation (e.g., new competition, change in material/land costs, sudden economic downturn).

Right now, the current economic conditions are leading to reductions in business revenue forecasts, and there is a scramble to deliver expense reductions. In a knowledge/service economy, labor expense is one of the largest expense items that an organization can impact in short time period. However, in a knowledge/service economy, the workforce (the labor expense) is the key catalyst of value creation.

Without strategic workforce planning in place, I question the ability for an organization to execute a reduction in force effectively. It can be like clear cutting in a forest—executed rapidly with lots of collateral damage and limited attention paid to future business sustainability.

Reduction in Force Gone Wrong

The worst type of reduction in force I hear about is the type where everyone who wants to leave is able to take a package and go. But the absolute worst is when more people leave than what was desired/forecasted. This "peanut butter" approach—spreading the reduction in force evenly across the organization and/or roles—is like a retailer closing store locations based on the first letter of the city they are located in. It just doesn’t make good business sense.

A reduction in force has even become a way of doing business—shedding 5 percent or 10 percent of the workforce every few years even as they grow as a business. To my eyes, this "reduction-in-force-saw" approach indicates that an organization is sorely lacking in human capital management disciplines including basic headcount management (no bloating), performance management (managing out low performers along the way) and strategic workforce planning (aligning HC strategies with business strategies).

Enabling Smarter Reductions in Force Within Critical Roles

If an organization has done strategic workforce planning for a specific set of roles, they will have a context in which to process and understand the sudden change in business revenue and the resulting reduction in workforce "demand." The response to get out the "reduction-in-force-saw" will be tempered by a strategic perspective—the current state of the critical roles (i.e., are they in oversupply or undersupply), how various revised business scenarios change the workforce "demand" and revise the levels of oversupply/undersupply.

It also makes sense to revisit the "supply" side assumptions, as termination and retirement forecasts should reflect new conditions in the labor and financial markets.

If there is an oversupply, do the reduction in force, and do it right. Keep the best talent and apply reductions from the bottom performers up. Communicate it well and make some investment in preserving your employment brand along the way. Develop a way to stay in touch with the re-hireable folks impacted by the reduction in force.

If there is still undersupply in a critical role, a reduction in force within this role could send the business off track for years—possibly resulting in bankruptcy as one electronics retailer recently demonstrated. In this case, look for other reductions and efficiencies in the workforce. Cut the low performers who are unlikely to make a turn-around and consider reductions in pay (rather than headcount) for some of the low/medium performers in these roles. The reduction in force should be aimed elsewhere, away from a critical role that is in a state of undersupply even when the scenarios are adjusted.