Leadership through an economic downturn - Business Works

Leadership through an economic downturn

Linda Holbeche

Today’s uncertain times highlight more than ever that organisations do not exist in a vacuum. We operate in a global economy characterised by uncertainty, ambiguity and discontinuity. There is intense rivalry between firms. Just to compete organisations have to move fast, enter new markets, innovate continuously and serve customers across geographies and time-zones in ever more effective ways. With turbulence in the global economy as a backdrop, trading and operating conditions for many organisations are likely to be challenging for at least the next year or two.

Economists’ comments range from the pessimistic to the downright depressing. Alan Greenspan has predicted that the current US financial crisis is likely to be the most wrenching since the end of the Second World War. Others see the rise of China and India as the most important event of our era, and the current financial crisis in the West as heralding a turning point in the world financial system.

And capital shifts are only one of the mega-trends producing economic uncertainty. Add to that global demographics, migration, massive infrastructural spend, rapid consumption of natural resources including fuels, environmental risk and international terrorism and you have a pretty volatile mix.

Here in the UK, productivity remains a burning issue. Government figures show sharply slowing growth, compared with France, Germany and the US. A fifth or more of the UK’s productivity gap with these countries results from the UK’s relatively poor skills. About 70% of the UK’s 2020 workforce is already in employment, putting increased emphasis on the workplace to deliver skills development opportunities. Employers are having problems recruiting people with the necessary core workplace skills such as communication and team working. Basic skills in language, literacy and numeracy are also common deficiencies. Consequently talent, and skills development, lie at the heart of the productivity agenda. All our evidence suggests that even in the face of a slowdown, these skills shortages look likely to persist in many places.

So if the first stage of economic crisis may be past its peak and we are about to embark on the second stage, where problems spread to the wider economy and in turn add to the challenges facing the financial sector, then we are in for a bumpy time.

And what typically happens next? Businesses panic and shoot themselves in the foot. This is what happened in the early years of the millennium when trading conditions got significantly tough in some sectors of the UK economy for the first time in years. Once again recruitment freezes are evident, as are the signs of major cutbacks in development activity and layoffs in the City, with more redundancies likely to follow elsewhere.

« are we doomed to repeat the mistakes of the past? »

So are we doomed to repeat the mistakes of the past? Let’s look back and consider some of the lessons from the difficult years at the start of the millennium, when many companies responded to pressure from money markets and laid off key staff. End result: come the return of growth, the organisations which had been most single-minded in getting rid of people or in sweating their human assets found that the very people they needed to fuel growth were not there. The immediate short-term had scuppered the medium-term.

Organisations also stopped investing in the staff they retained, including leadership development. What soon became obvious was that without leadership, competing activities and crises would distract attention, leading to spirals of wasted effort. Treating people as disposable assets also led to much more transactional and hard-nosed relationships with employees who remained, where good performance came at a price and formed part of a heavily incentivised deal from then on. Don’t expect people to ‘go the extra mile’ if they don’t trust you.

Conversely, those companies who maintained strong commitment to talent and kept faith with employees during the last tough patch, reaped the rewards of innovation, performance and growth. What distinguished the bare survivors from the thrivers back then was leadership and a determined commitment to building performance and growth through people. After all, creating a high performance workforce is not an easy task.

So what might be different this time?

First of all, the engine of economic success is changing. Organisations have always competed in several markets simultaneously – financial, customer / product and labour and currently there are challenges in all of these markets. Globalisation is a significant factor. In the developed economies, knowledge work and knowledge workers are becoming the primary sources of economic growth.

This is creating demand for high-level skills and ‘talent’, able to build competitive advantage for their employers. Ironically, the toughest market to compete in may soon prove to be labour, as skills shortages grow in every sector, especially at the high-skill end of the jobs spectrum, as is evident for instance in the world-wide competition for construction engineers. The Leitch review predicted that without radical improvement in how skills needs are addressed, the UK would rank 15th in low skills and 13th in intermediate skills out of 30 OECD countries by 2020. According to a global study of HR challenges in 2008 by Boston Consulting Group, ‘companies may soon find talent scarcer than funding, as individuals gain more employment options’.

The nature of ‘workers’ is also changing. Today’s workforces are much more diverse than yesterday’s – by culture, race, gender, ethnicity, personality, thinking styles and age. As the Baby-Boomer generations near retirement, so they will take their work values and practices with them. Generations X and Y can multi-task, but are easily bored, and therefore more likely to shift jobs to find the development, challenge and motivation they crave. Getting the best out of a multi-generational workforce requires new skills and management styles.

« need for a shift in the nature of management and leadership »

So with a fundamental shift in the marketplace and the nature of work, there comes a need for a shift in the nature of management and leadership required if UK organisations are to remain competitive. The BCG study suggests that firms should actively implement programs which lead to talent affiliation and development. Managers are the key to mobilising, deploying and retaining key talent. Lose a key player and you lose not just their intellectual capital, but also their social capital, including customer relationships and their potential to add value to your business tomorrow.

And if the world is changing constantly, leaders need to change with it. Economies based on knowledge and creativity require a level of management sophistication far above anything previously seen. Managers’ ability to exercise the kind of leadership which creates a motivating climate and challenging work opportunities for a more heterogeneous, diverse and flexible workforce will be key to sustaining organisational performance. The leadership paradox is that strong leaders are needed, but they can’t command change in employees – unless employees want to follow them.

With the shift to team-based knowledge work, traditional and hierarchical modes of leadership are yielding to a different way of working – one based on teamwork and community. One that seeks to involve others in decision-making, one strongly based in ethical and caring behaviour. This emerging approach to leadership and service began with Robert Greenleaf with his concept of “servant leadership”. Building the next generation of leaders is a means of future-proofing organisations.

In today’s challenging economy, organisations in every sector need to invest in developing leaders and increase the scale and speed of investment. When key talent is in short supply, if you want talented employees to stay, give of their best, help your organisation thrive throughout any downturn and fuel growth, you have to deliver on your employer brand promise. While we no longer talk in terms of ‘loyalty’ but ‘employee engagement’, in practice it can amount to the same thing. And that means treating talented employees fairly, as adults, keeping them informed about what’s happening, keeping your finger on the pulse of employee morale and maintaining your commitment to developing them. Keeping true to that commitment despite strong pressures to cut costs and lose heads is what leadership in uncertain times is about.

It is precisely when times get tough that leadership is most required, especially leaders who can lead people through uncertainty, keep people engaged and focused on performance, despite strong pressures to cut costs and lose heads. Leadership is central to maintaining great performance at every level - individual, organisational, national and international. This will be all the more the case when organisations are experiencing stronger competitive pressures. The temptation to get into massive restructuring mode tends to take the eye off ‘business as usual’ and leads to loss of business.

« leadership is needed throughout organisations »

And leadership is needed throughout organisations - not just at the top, though top ‘distant’ leaders have a disproportionate influence over what happens. This is where UK organisations score badly, according to a recent global leadership survey by DDI/CIPD. UK leaders are better performers, on average, than their global counterparts, though the proportion considered very good or excellent (44%) is still below the standards needed to grow and compete successfully on an international stage. Indeed when asked to rate the overall quality of leaders in their organisations, only a disappointing 8% of UK leaders rate them as excellent.

Continuing to develop leaders may be a vital positive signal of confidence in the future. Cutting back on what may be the essence of competitive advantage in the future would seem madness. Talent and leadership will be crucial to organisations’ ability to survive likely downturns and even improve performance through what appear to be bumpy times ahead. Leadership development is closely linked to talent management, so maintaining and even growing the investment in developing leaders will produce significant pay-back and enable organisations to build differentiation and competitive advantage through turbulent times.

I firmly believe that the business leaders with the courage to ride out to meet the storm and the wisdom to invest wisely and prudently in the future, will outperform those that rush to downsize and batten down the hatches. Troubled times bring challenges and economic necessities – but they also bring opportunities.

For further information about the Chartered Institute of Personnel Development (CIPD), please visit: www.cipd.org.uk.

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