The early signs of global economic recovery are starting to show, albeit through shakily stabilizing markets and guardedly optimistic forecasts. While economists argue about the pace and shape of the eventual upturn, one thing is indisputable: the smartest companies are looking ahead, strategizing for a better future and seeking competitive advantage as the engine of financial recovery coughs back to life.
For Asia’s organisations the next couple of years are certain to be a time of tremendous opportunity and risk.
Indeed Asia is the best performing region amid the worst global recession since the Great Depression. The mood across boardrooms in Asia appears to be lifting. Mercer’s survey: Leading Through Unprecedented Times, indicates that Asia’s agile, resilient companies are more upbeat about their economic prospects than those in the US and Europe. 25% of respondents in Asia see the same or better financial performance in 2009 compared to 2008. In the US it is just 14% and in Europe, 15%
Averting Human Capital Risk Hampering Growth.
Despite the economic strength of the region, many organisations in Asia have refrained from making significant human capital investments during the last six to 12 months. There’s no disputing the need for fiscal prudence and cost reduction during a downturn, but the cutback in human capital expenditures may dramatically impact companies’ abilities to respond when the market improves.
There are four broad areas of human-capital risk that companies should address now to ensure optimal business results when the economy turns around:
Availability, cost and performance of the workforce.
Volatility in employee rewards.
People issues amid organizational redesign and during mergers and acquisitions.
Social reforms and government regulations.
With respect to these issues, Asia’s most forward-facing employers will emerge from the downturn far better equipped to manage their people and more skillfully deploy their human capital strategies. Their ultimate reward will be a lasting competitive advantage linked to business results.
Risk 1: Availability, cost and performance of the workforce.
The workforce challenges that companies now face are complex and wide-ranging. The demographic realities of an ageing population and the accompanying loss of talent and skills as older workers retire make workforce planning a key strategy for future growth. Today’s planning can help companies identify and address potential labour imbalances and ensure they find the right people at the right quantity, quality and location.
At the same time globalization has somewhat eased the borders in the war for talent as today’s Asian workforce enjoys increased mobility and employment options. Yet, gaps persist in the supply of key talent in some markets. In high-growth China and India, where double digit wage inflation was not uncommon in pre-recession days, the cost, availability and retention of critical talent remains a key concern for businesses and will re-emerge as a top priority once the economy picks up. Therefore organisations should place a high priority on leadership development, a key component of any workforce that looks to a future of renewed profit and sustainable growth.
Just as companies have managed their workforce costs aggressively during the downturn, they will continue to face operating pressure to optimize workforce spending and increase workforce efficiency during the upturn. This means a renewed focus on workforce cost management and value creation for long-term sustainability. For example, companies need to allocate their HR spend to the employees and programmes that support business goals and help organisations accelerate the return to desired levels of growth and profitability. This does not mean wholesale cutting of benefits and HR programmes but rather getting more out of existing expenditures. Wise investment in HR-related programmes, pay, benefits training and development, and work/life programmes, can help strengthen employer branding and attract key talent in a competitive job market.
In addition to operating pressures, companies are also under economic pressures to capture top-line growth amid shifting markets. The impact of the financial crisis in the West has far-reaching consequences—especially for the export-driven side of Asia’s economies. Fortunately, governments have stepped in with large stimulus packages, and Asia is relatively resilient, and should continue to benefit from growing domestic demand.
In this time of unprecedented change companies need to ensure that systems and processes are in place to reduce volatility, and deliver HR programmes that support the needs of its increasingly global workforce. Companies able to improve HR management and increase the agility of their workforce will be able enough to take advantage of the opportunities presented by the upturn. Companies should revisit their pay and benefit plan designs and consider implementing a variable cost structure that is flexible in both good and bad times. The export-dependent economies of Hong Kong and Singapore, in particular are vulnerable to production-cycle volatility in the manufacturing sector. This makes it essential for companies in these markets, to mitigate their disruptive down cycles and maximize profitability during the up cycles.
The economic downturn and cost-cutting measures at the workplace have also left many employees feeling nervous and disengaged, which may severely impact corporate performance. Mercer’s June research indicates that employee fears about job security have increased from last November’s low of 15% to more than 50% in May of this year, Past recessions have seen the erosion of employee commitment, the destruction of trust, and the best and brightest workers jumping ship to join well-managed competitors or other, more stable industries. Companies can re-engage, motivate and retain key staff through effective communication and change management programmes. When the going gets tough, it is imperative for leadership to communicate an inspirational vision and rally the troops in a common direction.
Risk 2: Volatility in Employee Rewards.
In terms of reward programmes, i.e. pay, benefits, career development, and work/life initiatives, employers should take a holistic approach to mitigate differences in employee demographics, varying degrees of risk tolerance, and to ensure long-term sustainability from a cost perspective. Companies face substantial downside risk in many of their employee reward programmes—most profoundly in the area of health and retirement benefits. Overall health care costs are escalating amid medical cost inflation, higher quality care expectations and a rise in stress-related claims, while retirement plans are suffering poor returns in the aftermath of the financial tsunami. Sponsors of fixed benefit plans in particular are facing downside risk in providing fixed benefits for retiring employees amid a volatile funded status arising from variations in asset values and discount rates.
One positive outcome from the global economic crisis is an increase in centralised or regional strategies and controls to manage the volatility of employee rewards programmes. Centralised control presents an opportunity to improve governance while saving money by leveraging economies of scale, streamlining delivery of services to employees, and shortening the decision-making process. As regional frameworks are implemented around executive pay, employee health and benefit programmes, training and development programmes, and other HR-related initiatives stand to garner savings that can be carried forward well into the period of economic recovery.
Risk 3: People Issues in Organisational redesign and during mergers and acquisitions
The economic downturn has caused many companies to maximize their enterprise value through organisational redesign. Given the diversity in Asia and the changing business environment domestically and abroad, companies are realising they need to examine and adjust their internal organization and therefore optimize their capacity to respond to the external environment.
The Rules of Recovery
There are eight critical issues your company must address now in order to create a competitive advantage once the markets turn:
Workforce planning for the future
Planning today can help companies identify and address potential labour imbalances and ensure they find the right people at the right quantity, quality and location. For employers in Asia, a keen focus on leaders and high potential talent is critical given the imbalance in the supply and demand of these invaluable resources.
Regional strategies, framework and solutions
Organisations can leverage economies of scale from regional frameworks on executive pay, employee health and benefit programmes, and training and development, and vendor management that can be carried forward well into the period of economic recovery.
Successful M&A strategies for Asia
Companies stand to make huge financial gains if they are sufficiently agile and bold in making acquisitions in a downturn provided they plan for HR-related issues during due diligence and post-close through effective change management.
Spend optimisation
Wise investment in HR-related programmes better aligns with business needs and employee preferences and demographics can help strengthen employer branding and attract key talent in a competitive job market.
Organisational design for business results
Companies can benefit from adopting an organizational redesign that cuts costs while restructuring for growth.
Managing Risk
Companies that take a holistic approach to mitigate the human capital risk that could hamper their growth stand to make considerable gains in the upturn.
Capturing top-line growth through effective HR
Companies able to improve HR management and increase the agility of their workforce will be able to take advantage of the opportunities presented by the upturn.
Implementing new government regulations
Companies must understand the requirements as they manage their human resources and monitor th impact for future projections of cost stemming from increased regulatory oversight.
In some of Asia’s export-dependent economies such as Japan, companies can benefit by adopting organisational redesign through a “shrink and grow” strategy. This approach involves cutting costs, shrink, and restructuring for growth.
Among the “shrink” strategies, are the optimisation of employment and labour cost and organizational restructuring for conglomerate management. “Grow” strategies, on the other hand, focus on HR programmes directly linked to increased top line performance and include leadership development, sales force effectiveness, organisational management diagnosis, and an evaluation of the competitiveness of overseas offices.
Underpinning the success of such restructuring is effective communication and change management. Employees must understand the business rationale for the change and embrace behaviours that accelerate adoption and acceptance to ensure business results are achieved.
Change is the only constant
Ultimately, in a fiercely competitive business landscape where change is the only constant, companies must not only be ready to adapt but also to lead, ensuring superior levels of performance as business conditions strengthen. As we face the unpredictable swings of the months and years ahead, a company’s human capital is it’s best competitive advantage. Organisations that ignore their workforce stand to lose critical market share and industry leadership.
Enduring an economic crisis can be debilitating, even devastating, for an organisation. But failing to seize the opportunity presented in the inevitable upturn would be a dual tragedy. Asia’s unique positioning as the world’s greatest engine of economic growth should go a long way toward averting that.
“Organisation redesign also means reassessing and prioritizing investments in the HR function. Companies should look into cutting back on lower-value and less-critical HR services, and focus on maximising the efficiency ad effectiveness of the HR function…Knowing where every dollar comes in and goes out is useful, and it is the first quantitative step to helping understand how effectively those dollars are being put to use.” Guo Xin, Asia Pacific business leader, Mercer.
Paul Arkwright
Publisher
