Watching the economy often yields more questions than answers. As some positive numbers filter out on economic activity the two questions I hear most are “Will the rebound last?” and “When will the rebound start creating job growth?”
Unfortunately the creation of jobs and the subsequent lowering of unemployment lags behind the growth of economic activity. Whenever there is an economic downturn, organizations are forced to rethink their business operations in order to survive. The decline last year resulted in significant payroll cuts as organizations trimmed back and cut costs trying to stay in business.
If you look at the national numbers one of the consistent patterns when this type of cut occurs is the increase in productivity. Not only are firms cutting personnel, they are also rethinking the operational model they use to do business. Some people interpret these gains as just meaning that the remaining employees are working harder. Perhaps there is a thought that the least productive are fired first. That does not fully explain the change we see. Productivity gains are the result of finding efficiencies in operation.
One of the implications of this is that a rebound does not mean a return to business as usual. Firms will not choose to go back to a less efficient business model from before the downturn, now that improvements have been discovered. Jobs will not be created until the pace of economic growth is sufficient for firms to be confident they can hire and keep employees working under their new business model.
The recognition that improvements that result in increased productivity and efficiency will not be reversed also gives another rule of thumb for evaluating changes. Two such rule of thumb questions have been asked by managers for over a year now. First, “What activities if we had it do over would we not start?” Second, “What activities if we terminated would we not restart?” Many times managers are faced with making cuts or operational changes with limited information. The future is uncertain and the behavior of both employees and customers change when the environment requires they must. These questions help cut to the fundamental strategic underpinnings of the decision.
If you are evaluating some significant changes in response to the economic environment ask whether you would undo the changes when the economy improves. There are many changes that are structural to an organization and deserve careful thought before implementing. However, if it is obvious that once the change is made you would never voluntarily go back to the prior mode of operation, then your decision should be clear.
If the organization would never retreat from the decision, that is a strong indication that the choice should be faced and taken care of now. Even though the current decision may be difficult, postponing action does not remedy the problem.
A tougher issue may be recognizing the past decisions that with current information are mistakes. In this environment it is urgent to cut losses and dispose of those activities that detract from the organization’s success. Once the baggage has been cleared from past decisions a foundation is in place to allow new growth. Employment increases require that the economy reach the stage where firms have completed the cutting and retrenchment and have seen enough improvement in the core business to begin to rehire. That will only occur when there is confidence that the economic recovery can be sustained.
Darrell Parker is dean of the George Dean Johnson Jr., College of Business and Economics and Professor of Economics at USC Upstate. Contact him at email@example.com.