The Effects of the Recession and the HR Response

Reflecting the general business environment, most participants identified a range of commercial pressures bearing on both their own businesses and on those with which they were conversant. Downturns in sales and profitability were widely identified as major pressures. The cost and availability of credit was also identified as a significant pressure, particularly in financial services. Share prices had fallen significantly in a number of firms. In some markets, changes had occurred in product ranges: for example financial institutions switching from mortgage provision to deposit taking. In other instances in professional service firms, entire product areas had virtually disappeared from the market. In financial services some participants spoke in terms of a ‘huge loss in business confidence’, although instances were related in other sectors in which investment projects had been proceeded with, even in the face of recession an falling sales. Participants also identified higher price sensitivity on the part of consumers as a significant consequence of the recession. In retailing people were seen to be shopping around more in addition to buying less. This involved acute commercial pressure for a relatively small operator that could not compete with the major multiples on price and had to balance cost reductions with retaining a level of service to customers that was the key to retaining their business. A firm in the hospitality sector was seriously affected by a fall in the discretionary spend available to consumers and by the existence of a high level of excess capacity in the industry, driven by tax incentives during the boom. The result was pressure on the prices that could be charged and a lower level of yield on sales.

Other firms had suffered from the effects of closures by major customers, resulting in a huge reduction in orders and no new business. A firm in the food industry supplied global markets in food ingredients and the local and UK markets in consumer foods. In the latter business

there had been volume reductions and pressure on prices as suppliers sought cost cuts in good supplied and supermarkets shifted from branded goods to own-brand goods. Even in sectors relatively insulated from the recession, such as medical devices, elective surgical procedures, for example, had been affected resulting in falling sales volumes. Also changes had occurred to product ranges with demand falling for high-end produce in favour of more generic products. These developments were compounded by changes in product purchasing strategies in major markets, such as in the US, where centralized purchasing functions in healthcare providers meant pressure on the prices that could be charged. In one major IT and communications firm with a global reach there had been an ongoing programme of change and restructuring encompassing the company’s Irish operations. Here the parent firm was seeking to focus on global growth areas, and the challenge to the firms’ Irish operations was to move up the value chain. Central to managing this challenge was achieving cost reductions and productivity improvements in the Irish operations.

Some businesses were significantly affected by the rising value of sterling, even where turnover had not been greatly affected by the recession. When products sourced were priced in sterling but sold in Euro, ‘margins had collapsed’. One firm more affected by an adverse exchange rate than a decline in turnover was forced to restructure the business, closing a significant number of loss-making outlets.

A distributor for a major retailer had found that the retail company HQ had assumed control from the firms’ Irish management during the recession and insisted on exacting cost savings and business targets – pressure made more acute by the higher cost base of the Irish distributor. In the HR manager’s eyes, the fact that the firm was now dealing with the UK HQ meant that the ‘focus was on cost, cost, cost; the holiday is over’ – something that staff and unions had been reluctant to accept.

The estate agency had seen the property market fall sharply early in the recession with major implications for the volume of business in both the residential and commercial property arms of the business. A newspaper had experienced serious commercial pressure even during the boom and had been grappling with secular change in the media sector that included the advent of networking sites on the internet and changes in the ways people acquired news. To this the recession had added a fall in circulation and a decline in advertising revenue. A

retailer had also experienced declining sales before the acknowledged onset of the recession – a trend compounded by the liquidation of some in-store concessions involving high-street brands, from which a significant share of revenue had been obtained. A hospital was very heavily reliant on state funding, which had fallen by about 15 per cent from 2009-2010. A rising share of management time and clinical resources had also to be devoted to meeting increasingly exacting regulatory standards. Demand however had continued to increase. A professional services firm that had won a series of accolades for being a ‘good employer’ found that with the onset of recession its ‘revenue base had fallen off a cliff’, leading to a sharp cultural change in the company’s operations. Because the firm’s people were its main asset base, the actions needed to ‘right-size the cost base had to be very stark’. A construction and engineering design and management firm had borne the direct brunt of the virtual collapse of the construction sector, resulting in a sharp fall in income and activity, followed by a high level of redundancy involving around 1 in 5 staff.

A number of the multinational firms included in the focus groups saw the recession as exacerbating pressures already evident during the years preceding the downturn, and the major challenge they identified was the cost and specifically the labour-cost competiveness of a firm’s Irish subsidiaries relative to other locations in the parent company. Irish subsidiaries were seen to be in competition for production and investment mainly with other locations in Europe, the Americas and in emerging markets. This competition had been rendered more intense by volume reductions, pressure on product prices and sometimes by over capacity and changing tax regimes in competing jurisdictions. What were seen as the high labour costs of Irish subsidiaries were sometimes further compounded by adverse movements in exchange rates with major currencies such as sterling and the US dollar, further weakening the competitiveness of Irish plants. In these ways the recession had thrown into sharper relief the mandates of local subsidiaries of multinationals and added to the challenges of preserving, renewing or developing such mandates. The focus of competition and the challenge of finding ways of competing with other subsidiaries were highly salient to the HR managers involved:

From a local perspective … it’s about our competitiveness versus other internal sites within [the parent company] in as much as it would be in terms of other companies or other competitors. So for us to remain competitive versus other sites [named sites in Latin America] - they’re particularly low

cost labour – you need to compete on some basis other than just on labour cost.

The HR managers involved in all of the focus groups held largely common views as to the implications of these various pressures for their areas of activity. In general they had experienced acute pressure on costs, especially labour costs, on headcount and labour supply in general and pressure to improve productivity. In parts of financial services, in particular, ‘headcount reduction and cost management has been aggressively put in place’, although it was also noted that the state guarantee of loans and deposits put in place by the Irish Government in late 2008 had had the effect of constraining some participating firms’ reactions in the areas of cost and headcount management. Pension funds also in some cases had been negatively affected by the recession and one participant spoke overall of a ‘survival agenda’ having come into being in the HR area. Several multinational subsidiaries had reduced headcount significantly but had also sought to automate production to reduce their vulnerability to uncompetitive labour costs relative to other locations within their parent companies’ operations:

The reality for us is that we are never going to be able compete in terms of labour costs … so as a plant what we’ve been trying to do is to take in a more highly automated sort of manufacturing… . Your labour cost in an awful lot less and that’s what we’ve been working at.

Not all markets or firms had been so severely affected. In areas like software development and ICT business remained relatively buoyant. But even here ongoing restructuring that preceded the recession was a significant background influence. A software development firm had initiated a restructuring programme ‘ahead of the curve’ prior to the recession. While there had at the time been an acute decline in morale, the company’s operations had ‘bounced back’ – an outcome attributed to the ease with which those who had left had found jobs. So with the onset of the recession people had already been acclimatized to retrenchment and to a situation in which ‘finance had taken control’ and where costs, including HR-related costs were subject to rigorous examination and containment. Those seeking to add new jobs in the firm’s Irish operation are conscious of the higher cost involved than would arise in adding a job in the company’s operation in a low-cost location – although a formal case does not have

to be made for favouring one over another location and the firm does not operate on the basis of competition for investment and jobs across locations.

In another service firm, the picture varied by product line. Business had fallen significantly in the firm’s retail outlets, though closures had been avoided. The company’s online business had, however, grown sharply. In effect the company, which overall remained very highly profitable, now saw itself as operating two businesses with different growth prospects and levels of profitability. The result had been that while some senior management continued to enjoy good bonuses and salaries, pay had been reduced across the retail business and a pay freeze had initially been introduced across the fast-growing online business. This series of developments posed ‘cultural challenges’ and was seen to have been ‘very tough’ on both the staff in retailing and on the staff affected by the pay freeze in the highly profitable online business.

Even some firms who had not been forced by commercial circumstances to adopt a retrenchment agenda, identified challenges in managing staff ‘complacency’ and of ensuring that staff did not assume that things would continue to remain as they were. In one such case a small anticipated pay rise was withdrawn and a pay freeze had been instituted in one company that had also redeployed staff as an alternative to instituting redundancies. Disaffection with the company’s responses by even a small section of the workforce was seen as a surprise and an indication of the challenge in instituting ‘realism’ in this case. An ICT firm also provided evidence of the challenges involved in managing staff in a business that had remained profitable during the recession. While the business, judged in terms of key performance indicators, remained positive, senior management anticipated that the ‘future would be tough’ and that the business needed to be ‘reshaped in a different way’ for the challenges that lay ahead. The company had embarked on a ‘low-key’ restructuring programme with minimum required redundancies and a freeze on headcount. This had given rise to the challenge of maintaining the firm’s culture, about which it proclaimed to remain ‘passionate’ and which involves a consistently positive employment experience and good programmes for staff, amid the ‘uncertainty and fear that had started to creep in’, due to the restructuring programme and arising from the very different employment experiences of partners and friends working in other sectors. Yet still, the HR manager observed – without

elaborating on any direct HR implications – the sense that can be created is that the company’s employees ‘aren’t living in the real world’.

Reflecting an economy in which the recession nationally had resulted in a 10 per cent contraction of GNP in 2009, close on a 3 per cent fall in export activity, a 14 per cent fall in the volume of retail sales (6.8 per cent if motor sales are excluded) and in which the state had intervened to prevent the collapse of the banking system, many participants spoke of the speed of the onset of the recession and of the depth of the retrenchment that resulted. The new conditions faced by firms marked a very sharp contrast with the high growth commonly experienced during the Irish economic boom and what was seen by some as the ‘bloated headcounts’ that were allowed to build up during this period. As one contributor was concerned to emphasize:

If we look at previous recessions there wasn’t the same emphasis on headcount reduction. Organizations cut the training budgets, counted the paper clips, did all the issues but largely issues that were ‘non-people’. The difference with this recession, because of the intensity and pace of it, [was that] the only way we were going to be able to achieve the reductions and to meet the cost cutting that was necessary was to go straight into headcount reduction.

Keeping in mind that not all firms were affected to the same degree, the speed of the onset of the recession and the scale of the pressures experienced provide the context for the HR adjustments outlined by focus group participants. The main areas in which HR managers had directly responded to the pressures caused by the recession and some of the implications for the management of HR will be considered in turn.

Managing pay and headcount

Virtually all of the HR managers participating in the focus groups had been involved in initiatives concerned with managing retrenchment with respect to pay levels and/or headcount reductions and short-time working. Cuts in payroll budgets were widely remarked upon. Pay freezes and freezes on pay increments, on progression through salary bands and on promotions had been implemented by focus group participants. In addition, bonus earnings had been heavily curtailed in some cases where bonuses were related to sales figures.

Deferred bonus arrangements were also introduced in areas of financial services. In some instances, bonuses were paid for 2009 following the introduction of a new performance management system and better than expected performance in the final quarter of that year, but were unlikely to be paid for 2010. For staff accustomed to bonus payments or employed on modest basic rates, where bonus earnings were relatively significant, these changes were seen as having a considerable impact on pay and conditions. Cases were also reported where lower rates had been introduced for new recruits to a series of staff categories.

Headcount reductions were widespread and often acute – in some instances involving up to a third or more of the workforce - and these were achieved through a variety of measures. Freezes on recruitment were widely instituted, backed in some cases with the utilization of temporary or contract employment to add resources where controls on recruitment were ‘very stringent’. A case was reported where a firm, operating in the shadow of the state guarantee for financial institutions, had successfully implemented ‘incentivized career breaks’ to achieve temporary reductions in labour supply. This had been welcomed by unions as an alternative to redundancies. Where this was used, little attention had yet been devoted to the issue of those involved choosing to return to work in the future: the measure had ‘bought the company time’ with which to ‘work … through other issues, other initiatives’. Voluntary redundancy programmes had also been implemented. Some of these had been over- subscribed, to the evident surprise of HR managers involved. ‘Exit terms’, when competitive, or even when on par with general practice, could secure significant reductions in headcount. Many people’s willingness to accept voluntary redundancy terms was explained in terms of the longevity of companies’ operations in Ireland and ‘greying of the workforces’ in plants where this had been the experience. ‘People had their ‘families raised’ and were happy to go and do something for a couple of hours a week. Some also harboured fears that the businesses involved might not survive and that the terms available in future would be significantly worse than those on offer. Working conditions were also a factor. Shift working for long periods had tired some people. In some cases voluntary and compulsory redundancy programmes had been used serially to reduce headcount in successive waves of responses to falling sales and corporate restructuring. In other cases HR managers had felt they had no alternative to what one described as the ‘nuclear option’ of sizeable compulsory redundancies that comprised 25 per cent of headcount. Several cycles of compulsory redundancy programmes

had been implemented, somewhat to the dismay of the HR manager involved, who would have preferred to have obtained the required reductions in a more concentrated manner.

In managing redundancies, some firms with a tradition of outplacement extended this practice to redundancies caused by the recession, seeking to ‘make sure that people who have had to leave us were looked after’. In a professional services firm a large proportion of staff made redundant had been successfully out-placed. Another firm had brought Fas and the local social welfare office to meet employees being made redundant to ‘save them the indignity of having to go out of full-time employment and stand in a queue for a couple of hours’.

The use of multiple measures to control pay, headcount and labour supply was common. Pay freezes and deferred pay rises might be accompanied by redundancies. The same kinds of measures might also be further accompanied by unpaid lay-offs implemented on a rotational basis. Some firms had used temporary short-time working, while others had resorted to short- time working on a more prolonged basis. It was common for firms across different sectors to implement packages of measures such as combined pay freezes and redundancies, sometimes