Another Oil and Gas company is laying off head office staff in Calgary. Another victim of the typical down cycle "contraction" that oil and gas companies go through every few years. This is so common place that many in the industry see it as normal. Oil goes down, people get laid off, oil goes up we hire them back. This is the tune everyone sings. But I suspect that tune may be coming to an end, that "winter is coming" as we GOT (Game of Thrones) fans are apt to say. 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 looks like.
The Immediate Cost
There is lots of research in HR circles around the estimated cost of losing an employee (voluntarily or otherwise). Those numbers are often represented as either months of salary or percent of salary. In months 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 people the numbers range from 15% to over 200% of that positions' salary 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. Its not 15% but its not 200% either.
I did some further research and 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 by say around 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 lay offs 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
Research done by Gallup and other organizations like it show 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 become fashionable of late and the numbers for this come in at $366k (USD) per employee. Source: Zacks Investment Research. 'As of August 13, 2015' Again for the sake of argument lets assume a straight 1-1 correlation between engagement and profit per employee. At two percent that 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 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 one company and another and these will be impacted by a number of 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 work force 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. They take 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 skill sets.
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!