Ups and downs

8 August 2008

At first pass, last week’s revelation that Morgan Stanley plans to blow $1bn hiring top executives and other key recruits doesn’t seem particularly relevant to London entrepreneurs struggling to make their way through to the next funding round. But the company’s strategy, disclosed in the Financial Times, says a lot about the way large organisations tackle economic downturns. Morgan Stanley is investing heavily in key people at a time when financial institutions around the world are buckling down in response to the credit crunch. If the companies at the sharp end of the financial crisis are still spending, what does it say to the rest of us?

The idea of investing in people during a downturn isn’t new, of course. While most companies instinctively look to cut back when economies slow down, wielding the axe indiscriminately isn’t the right approach. Yes, everyone needs to review their expenditure and shave whatever costs they can – and in many cases, that means making tough decisions to prioritise spending. But it doesn’t mean you should pull the plug on all of your marketing, slash R&D, fire your best people and head for the nearest bunker.

In fact, downturns present both short-term and long-term opportunities. If your business is under pressure, your competitors will be feeling the pinch too. So if you can work out a more effective way of balancing costs and investment than they do, you give yourself a better chance to win new business, poach their customers, perhaps even break into new markets. And if you can keep one eye on positioning yourself for the recovery when others are keeping both eyes on their dwindling cash flow, you’re likely to be better placed to take advantage when the upturn starts. It’s not about just cost-cutting – it’s about saving and spending smartly (see ‘The Gathering Storm’) .

Morgan Stanley’s approach is a good example. The $1bn that the Financial Times says it’s earmarking for its hiring extravaganza comes directly from savings it made in the first four months of the year, when it cut ten per cent of its workforce in areas such as investment banking. That money is now being spent to bolster better-performing parts of its business.

This kind of approach to people management is a critical part of surviving a downturn. It’s hard to find and retain talented people at the best of times, but downturns change the whole dynamics of the labour market. On the plus side, it’s easier to keep a lid on wage demands when unemployment is rising, and many people are less inclined to gamble on switching jobs – so it should be a little easier to retain your best people. Likewise, as companies shed jobs, talented people will inevitably find themselves on the labour market – and with less bargaining power when they negotiate with you.

On the other hand, of course, in difficult economic conditions people tend to look for stability – and start-ups and small businesses aren’t exactly known either for longevity or for being risk-free work environments.

So what can you do to make the most of the people opportunities? Firstly, even in a downturn you need to keep an eye out for top talent coming onto the market. Bear in mind that recruitment isn’t just an administrative HR exercise: in a world of talent shortages, it’s much more of a sales and marketing exercise, and you need to treat it the same way you’d go about acquiring customers. That means targeting your recruitment efforts and leveraging your contacts – including referrals from your own employees. You also need to be able to market your strengths as a company to potential recruits, both generically (especially through your website) and in one-to-one conversations. And you need to move quickly: in uncertain times, people are often more inclined to take the first offer they get than gamble on their preferred employer coming up with the right deal.

Secondly, it’s important to take steps to keep your best people. In addition to offering a decent reward scheme, you also need to get their buy-in to your business plans – so it’s worth thinking about how much information you can share with them about your business and prospects. And think about their long-term plans. Training budgets are often one of the first things to get cut in a downturn – but before you do so, make sure you’ve still got credible development opportunities available for your top performers.

Finally, bear in mind that you’ll need to be as adaptable as you can to keep afloat in a downturn, and that means your employees will need to change with you – which could mean anything from taking on new responsibilities to swapping jobs. Managing this kind of people-based change is likely to be one of your biggest challenges.

By Keith Rodgers, Webster Buchanan Research