On 12 September 2001, US airline companies faced a difficult situation. None of them were flying following the tragedy at the World Trade Center in New York. Moreover, the companies did not know precisely when they would be permitted to fly, what the market demand would be, and the security requirements and other conditions that might affect their operations. So, of course, the airlines did what companies facing turbulence typically do: all, except one, laid off large numbers of people. By the end of 2001, the one exception, Southwest Airlines, had a market capitalisation greater than the entire rest of the US airline industry combined. And Southwest had used the demoralisation of the workforces of its already struggling competitors and their lousy customer service to gain market share and competitive position – a competitive advantage that, once acquired, has turned out to be pretty enduring. Years before, explaining why in an industry marked by rounds of employment cut-backs and wage and benefit give-backs Southwest had not followed the pack, Ann Rhoades commented, ‘Why would we put our most important competitive asset, people, on the street where they can be snapped up by the competition?’ Why, indeed?
When the technology bubble imploded in late 1999 and early 2000, most high-technology companies that a few months before had been desperately seeking workers and offering all kinds of perquisites, turned around and cut their training, laid people off and cut benefits. And then there was SAS Institute, the largest privately owned software company in the world. SAS, a business intelligence, data warehousing and statistical analysis company, figured out that 2000 and 2001 were just the perfect years to expand because a lot of great talent was on the street. SAS used the retrenchment of the competition to attract people not by throwing money at them but by offering great working conditions and the idea that the people would actually have a job for the long term. And SAS also used the fact that its competitors, in all of their cutting, also reduced product and service innovation and the quality of the customer experience to build deeper customer relationships with existing customers and attract new ones.
The fact of the matter is that when times are good, even idiots can be successful. It is when times are tough that the best get separated from the rest. A.G. Laffley, the CEO of Procter and Gamble, has commented that it is precisely when times are tough and competitors are cutting back on investment in new products, innovation and capacity (both human and physical) building that provides the best opportunity to gain competitive advantage.
But there are precious few companies that have enough sense to actually act on some simple truths. The first truth is that buying high and selling low is seldom a path to success. I have seen this first hand in the semi-conductor industry, where for years companies would try to hire at the top of the industry cycle by offering large signing bonuses and then, when the cycle turned, get rid of the people they had hired in some instances only months or at most a few years before. Then when industry conditions improved again, the companies would once more all try to hire from the same talent pool and throw large sums of money around in their efforts. It is possible, and maybe even sensible, to behave in a countercyclical rather than a procyclical fashion. Holy Cross Hospital in Ft. Lauderdale, Florida, faced fluctuating demands for its services. Florida gets a lot of ‘snow birds’ in the winter who leave in the summer, so demand for hospital-based medical care has large seasonal variability. Like other hospitals, Holy Cross had laid off nurses in the summer months and then often had to use nurses from temporary help agencies to meet peak demand in the winter. Agency nurses were expensive, both because the hospital was paying the agency fee and because nurses were in some cases imported from other parts of the country. The hospital figured out that if it actually retained its staff, it would be an employer of choice. Being an employer of choice permitted it to attract and retain the best people who are, of course, more productive and effective. And Holy Cross also figured out that by not paying peak prices at the top of the cycle, it could afford to keep people on during the slow months.
The second, related truth is that the waves of hiring and lay-offs in an industry frequently drive talent out of the industry. People need to work, and if an industry offers uncertain employment conditions, employees will seek environments that offer more stability. Moreover, as we should have learned from finance, risk and return are related – industries that provide more certainty in employment can pay less because they are not asking people to assume as much risk of unemployment. The oil and gas industry nicely illustrates the problems of talent retention when employment fluctuates widely. For instance, dramatic fluctuations in employment on oil drilling rigs (corresponding to swings in the price of oil) have left the industry with a severe skills and labour shortage now that oil prices have apparently settled at a much higher level. A third truth is that there are start-up and shut-down costs that make all the fluctuations in hiring and, for that matter, training, very costly. It takes time and effort to put together training courses and a staff to deliver them, as well as the associated physical and technological infrastructure. Closing all this down and then restarting training when things get better entails both severance and hiring costs. Moreover, companies often wind up having the resources for training when people are too busy to attend programmes to upgrade their skills. Meanwhile, people have the time to develop new competencies at the very moments of organisational slack when training expenditures get slashed. Similar comments apply to hiring. Rebuilding recruiting relationships takes time and effort. Maybe it might be more sensible to just maintain those relationships and activities, at least at some level.
And there is a fourth important truth. Even though companies and particularly their HR departments seem to thrive on benchmarking and following the crowd to do what everyone else does, it is virtually axiomatic that if you do what everyone else does, you will get about the same results. It is almost impossible to earn exceptional returns by being one of the pack.
The problem is that courage and wisdom are both in short supply and it seems somehow safer to follow conventional wisdom, even if such wisdom is incorrect. But these very facts provide wonderful opportunities for organisations with the intelligence and skill to truly build competitive advantage through their people. As an executive in one of our HR programmes commented, ‘Annual report paper should come preprinted with the phrase, “people are our most important asset,” and most executives take this idea about that seriously.’
In their actions, companies and their leaders signal that people are costs and the lower the better. This is in spite of the enormous body of evidence on both country and company competitiveness that show that labour rates are not the same as being productive and competitive (for instance, the Economist Intelligence Unit recently ranked Denmark as the most competitive country, and Costco has higher profits per employee than Wal-Mart’s Sam’s Club even though it pays more and offers more generous benefits).
So, instead of bemoaning the economic turbulence and tough times, recognise this period for what it is: an opportunity to gain ground on a bunch of competitors that will probably repeat the mistakes of the past.