"Creative Destruction" - How to Manage Headcount in a Recession

Chris Young
May 21, 2009 — 2,634 views  
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Lately, I am being asked by Clients, how does one manage employee headcount in an economic downturn?

The answer is, "Manage your organizational headcount the same – regardless of economic downturn or prosperity."

The management of employee headcount requires that each team member's contributions are understood and reconciled against their economic cost or burden. In other words, if an employee team member is not creating as much or more benefit than they are costing, help them seek employment elsewhere.

Ever wonder why there are layoffs during an economic downturn? The short answer is economics. A more emotional answer… Quite often people allow economic inefficiencies to continue during good times that become economic liabilities during an economic downturn.

Perhaps you are seeking a more "scientific" answer… During an economic downturn, a phenomenon described as "Creative Destruction" is particularly evident. Coined by a famous economist by name of Joseph Schumpeter, "Creative Destruction", describes the reallocation of resources toward their next best use.

In other words, if a resource is not bringing an appropriate return on investment, "Creative Destruction" removes that economic resource and reallocates it to its next best use.

Think of your business model. Are you aware of any team members who are not "paying their way" or not covering their salary and support through their daily work activities? I bet you can. Do not worry… You are not alone.

But...  You better do something about it right now.

Think of it this way… Let's say "Fred", a low performer, is making $35,000 a year but only brings in $25,000 in benefit to the company. If the company is aware of this inefficiency, Fred may be laid off and a new employee hired who has the potential to deliver more than $35,000 salary in benefit to the company.

The problem with this thought process is that the employer often economically looks the other way when a "Fred situation" becomes evident. Why do they do so? For many reasons... A popular reason would be because Fred has been a "good long-term employee" and "loyalty should be rewarded".

The reality is that this type of loyalty is actually quite costly to an organization and the team members it employs. This type of loyalty actually has the potential to seriously impede a company's economic viability.

The reality is during economic "good times" someone is paying for Fred's short-comings. That $10,000 shortfall or difference must come from somewhere. Where does it typically come from? Economic profits.

During economic good times, a company can potentially survive having several "Freds" on the team. As long as there is enough economic profit that can cover this inefficiency, the Freds of the world will have a job. That is… Until there is an economic downturn.

Now we have an economic downturn.

Supply_demand To simplify what happens during an economic downturn we can rely on basic economic forces called "supply and demand". When demand decreases, price comes down (everything else equal). When supply increases, price comes down (everything else equal). Assuming that one or both of these basic economic forces are at work during an economic downturn, the potential for economic profit decreases quickly. As economic profit decreases the ability to subsidize or compensate low performers like Fred diminishes greatly. In fact, the mere existence of "Freds" in an organization can actually bring the entire business model down to its knees.

The potential of a moral debate presents itself. Some might say, "What about Fred's family?" Others might say, "What about the families of those who are performing?"

As the natural progression of an economic downturn continues an economic "cleansing" occurs. As this economic cleansing progresses, the business model is eventually forced to reconcile any and all inefficiencies that previously were allowed to exist.

Another question presents itself… "What can be done during good times to avoid "Creative Destruction" of this nature in the first place?"

The answer is simple. Always be aware of each team member's contribution. Always reconcile a team member's contribution against their compensation. When a team member's contribution to the business model is less than their compensation, corrective action must be put into place immediately. That corrective action involves reallocating the resource internally to the next best use or letting the low performer go to seek employment elsewhere.

Ultimately, how should a person manage organizational headcount in an economic downturn? The answer is simple. Manage headcount in an economic downturn the same way one should during economic good times. Make sure that the contributions of each team member, team, department, and company are economically more valuable than the cost of buying them. When the costs are higher than the benefits, then one must remove the inefficiencies as quickly as possible.

To fail to do so is to put the team, department, and business model into serious economic risk. That is a moral obligation.

If to date, you have not managed your headcount in this manner, it is vital that you perform a "contribution audit" to understand the value of each team member's contributions. Reconcile those contributions against their economic costs. Identify inefficiencies where the contributions of a team member are lower than the costs, fix them quickly or help them seek employment elsewhere. It is better to do it now while you have choices than later when you may not have as many options.

Now go Maximize Possibility!

Chris Young


The Rainmaker Group is a human talent maximization company specializing in helping organization maximize their bottom lines by improving employee retention, hiring the best talent possible, and strategic talent management and coaching services. From the Fortune 50 corporation to the small medical office, The Rainmaker Group guarantees lasting organizational change via a unique blend of energy, insight, and science to maximize talent, transform organizational culture, and provide strategic intervention.