"Hu" Centered Leadership - Sometimes the Numbers Don't Measure the Cost

We are living in "interesting" times. Where I live we have been hammered by COVID shutdowns on top of energy unfriendly policies emanating from our nation's capital and an actual downturn in our energy sector. These times have seen victim after victim of the downturn and lockdown. Industry sectors who are used to going through this type of "contraction" every few years see it as just another part of the cycle. Markets go down, people get laid off, markets go up we hire them back. This is the tune everyone sings. But I suspect that this time that tune may be coming to an end, that as we GOT (Game of Thrones) fans are apt to say "winter is coming." There has always been a cost to these things, so in true operational excellence tradition, I am going to lay out some "placeholders" just to give us an idea of what that cost looks like.

The Immediate Cost

There is a lot of research in HR circles around the estimated cost of losing an employee (voluntarily or otherwise). Those numbers are often represented as either loss in months of salary or percent of salary. In the months model, the number most frequently provided is nine. That is to say that it costs the equivalent of nine months' salary to replace someone in that same position. For the percentage model, the numbers range from 15% to over 200% of those positions' salaries to replace them. This is based upon the premise that replacing an EVP is more costly than replacing a manager or geologist. For the sake of this discussion, I decided to opt for both. I figured that nine months' salary is the same as 75% so why not use that as a place holder. It is not 15% but it's not 200% either. 

I did some further research and a study done by Hayes Oil and Gas Recruitment a couple of years ago pegged the average O & G salary in Calgary at around $130,000. When we take that number and multiply by 75% and then factor in an example of 300 laid off we get a cost of $29.25M. That is to say, this is what it will cost the company to get these positions back when things turn around. These numbers include things like recruitment, interviews, background checks, on-boarding, and training (assuming they get each hire right the first time around). It also includes lost productivity as it is estimated that workers don't get back up to pre-exit levels of performance for at least six months.

"But wait!" you say what about the savings to the company in terms of wages? Fair question and again using the latest set of layoffs as an example it would mean that our company has saved an average of $39M. Factor out the cost for re-hiring later and that is a net gain of $9.75M. A respectable number to be sure but is it really a net gain?

Decline in Engagement
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Research done by Gallup shows that during down cycle periods employee engagement drops from an average of 33% (let that sink in for a second) to somewhere around 28%. This is attributed to low morale created by the loss of coworkers and the uncertainty of the current market. New metrics measuring profit per employee have been conducted and the numbers for this come in at $366k (USD) per employee. Source: Zacks Investment Research. Again for the sake of argument lets assume a straight 1-1 correlation between engagement and profit per employee. That two percent drop in engagement works out to a drop in profit of around $50M/year. Of course, that is a ridiculous number and doesn't factor in things like the current drop in market prices (impacting profit per employee) and so on. So let's drop our number to 0.5 of one percent or one half of one percent. That still works out to a drop in profit of $12.6M. Suddenly that $9.75M savings doesn't seem quite as respectable does it? 

Now before all the accountants and CFO's form a lynch mob let me restate, these are only place holders and there is going to be variation between companies and these will be impacted by many factors. The point is they DO tell a story that contraction may not always be the best solution.

Winter is Coming!

Here is the kicker. When markets pick back up companies are going to be confronted with a very different workforce demographic. The "boomers" have decided that this downturn is just the motivation they needed to take that step into retirement and they are now moving out of the workforce in large numbers. As Stats Can reports that rates retirement have already moved from 175,000 per year to over 250,000 per year and that is expected to climb to 400,000 per year shortly. This group takes with them all of that "tribal knowledge" around operations and productivity and they take a large amount of leadership knowledge and experience. The demographics that are following this group the Y'ers, X'ers, Nexters, and Millennials are much smaller, lack that "tribal knowledge" and lack the leadership experience and skillsets.

Rather than ramping back up as anticipated many companies are going to be scrambling to fill those positions with qualified people. It won't be business as usual and companies that are not RIGHT NOW training and preparing their teams to use operational excellence - to do more with less - are going to be ill-equipped to compete. Winter is coming and what are you doing about it? Performance Leadership - Think About It!