Organizations are once again rethinking their talent agenda in the light of tougher economic conditions. What does history tell us for how they should approach this?
For thoughts on this, we reached out to Ranjay Gulati, a professor at Harvard Business School who co-wrote a 2010 Harvard Business Review article titled “Roaring Out of Recession” examining the practices of the 9% of companies that flourished during previous downturns. Here’s a transcript of our conversation, edited for clarity:
With the economic downturn, what are the best practices for people who are thinking about the talent agenda?
Let me start broadly. Let's think about what the knee jerk response of most companies is in an economic downturn, which is to cut costs. It's really about survival. The survival instinct kicks in, what you might call the defensive posture. So the entire focus shifts to 'We are in the business of survival.' Survival is key—paramount. It's interesting how you create a collective mindset around a common theme and the theme becomes survival. And a survivalist mindset involves cost cutting. So the obsession becomes with cost cutting, which is fine, I'm not disagreeing with that.
But, first of all, you have to remember, the best time to get ahead of competition is down markets, not up markets. If you look at market churn data—churn is change in market position, relative position—you see maximum churn in down markets, not up markets. It's really hard to leapfrog somebody when the markets are booming. There seems to be a reason for that, because everyone goes into hunker-down mode and there's a few companies—on average across three recessions, we found it was like 9% of companies that came out of recessions stronger. And here's a sad and ironic fact: it wasn't the same 9% across the three recessions.
They don't even learn. How do you create a growth mindset? How do we create an environment saying, 'Yes, we're going to have to manage costs, but—because people want to be on a winning team—how do you change the mood?' Do you want to create a gloom and doom mood? This is about survival, tighten our belts, Who are we going to lay off? How many are we going to lay off? So first is what people call morale. I really think it's managing the mood in the company. Morale is too restrictive a term. It is managing the mood in the organization and the mood in the organization is that we see this as opportunity.
What are effective levers for managing the mood?
One way of managing the mood is about outlining a growth agenda. People say, 'Let's think about our agenda for the next 12 months. Where are we going to cut costs?' And I'm not saying don't do that. Yes, here's our cost-cutting agenda, and by the way, here's our growth agenda. Here's how we're going to lean into the downturn to really leap frog competition, take advantage of opportunities, organic and inorganic, that we are creating. That means sometimes even excess cutting. We're creating the space, the resources, the slack to grow while others are in conservation, defensive postures. We want to find also a way to grow. So it's really outlining an agenda for growth.
Your research found that there are a few areas that were opportunities for investment during a downturn, including research and development and marketing...
That was what we found across those three recessions that we looked at. That's an aggregate trend. I wouldn't want to over-generalize from that to today and extrapolate 20-plus years later from the last recession we looked at. I want to be very careful in how I extrapolate my research to present-day terms. I would say it's really about a scalpel rather than a sledge hammer. You've got to identify pockets where you really want to invest and double down. And it's also going to be industry specific. It's going to be company specific. Where do we see avenues for growth? Which sectors, which geographies? I've seen companies talking about geographic restructuring saying, 'We need to rethink our geographic footprint.' Others are saying 'We need to rethink our customer footprint.' So what you're trying to do is be very deliberate. In strategy, we say the two fundamental questions are what game are you playing and how are you going to win?
So think about what game you are in and how you are going to win that game. What I would borrow from professional sports is a winning mindset, playing to win rather than playing not to lose. And that defensive posture is what really whacks companies in these markets. So one is managing the mood.
What are the implications for talent investments in an economic downturn?
That's a very hard but very pertinent question. It all depends on how you think about why people come to work. Behind all the talent investment questions is what's your theory of human behavior?
A lot of us buy into a Skinnerian view of the world. Reinforcement, it's money, get the right pay package to get the right talent. Well, you wouldn't get the right talent, but you're going to get the talent that is drawn to the pay package and they're going to be looking for the next pay package. So there's an incentive alignment. Yes, people want pay for performance. Don't get me wrong, all of us want to get paid. So, you absolutely need market commensurate wages. And it's not how much you pay people, but how you pay them. Then there was a second school of thought that came along, which is the whole job design school. Now, people really care about empowerment. The nature of the, ‘Do I get challenged at work? Is it a stimulating work environment? Am I learning? Am I around smart people?' So you need that too. 'I want to be stimulated, challenged, and I should be learning and growing and I should be feel like I'm getting autonomy and all that stuff.' And then in my recent book, I talk about how people also want to find meaning in work <affirmative>. I'm not saying they're mutually exclusive, but I think that different people have different propensities.
The labor market is a kind of a sorting system in which people sort themselves select themselves into an organization based on the kind of package they receive. And so you have to be asking yourself 'What what's my talent magnet? What am I trying to build here? What kind of organization am I trying to create? And who are the kind of people I want here?'
People have used in the past culture as the magnet thing. Culture was the catchall. If you look at Netflix's culture, Netflix is very open about it. Why did they put their culture deck out there? Because they wanted people to read it and say, 'Do I want to work here?' And Netflix always says, 'We hire fully formed adults.' Unusual statement. But the point is, they want to have culture matches. They want to find people who come and match that culture. They don't hire rookies, they only higher seasoned people. If you don't perform, they let you go. And so there's a talent-matching process going on. In this environment, it's good to step back and ask myself, 'What am I trying to build here?'
Because you're going to be tightening your belt. So now I want to hold onto my talent. That's key: What kind of talent do I want? And what kind of organization am I trying to build over here? The cynical view is that this purpose and meaning stuff is basically brainwashing to convince people to work for less money. I'm going to give you purpose and you work like crazy, but you're going to be underpaid. In fact, there's a lot of backlash against startups and that they were basically conning young people into coming there around some mission etc., but not giving them stock options, not paying them and saying, 'But you're working for a greater cause, you're going to save the planet.' So there's a lot of cynicism around that as well. My understanding of the Bureau of Labor data is that there are some percentage of people who are quitting for what they call personal reasons. Some of it has to do with, not the Great Resignation, but what I in this HBR article called 'the Great Rethink,' people are trying to put work in perspective.
The idea is that work is not some segregated thing I do on the side. Work is one part of my life, not all of my life. want to really situate and frame it in the right way and it better have some meaning. It better have coherence to whatever else I do in my life. So some organizations—not a lot—have understood this idea that part of our pay package includes money and status benefits, but it also includes a nice environment, includes a challenging place to work where you're going to grow, learn, and have responsibility. And we're hopefully going to help you connect and make it personal and feel good about what you're doing. In a downturn, that's presumably more important than ever.
When people start giving short shift to all that, when you go into this financial oriented mindset, you start to neglect those kind of things because it does involve some minimal deployment of resources, investing in culture, investing in talent investing—all that goes out the window. All training programs go out the window, all employee wellness programs go out the window, all this other stuff. This is seen as frivolous stuff. And that's a big mistake. Then what we'll do is to retain talent, we spend money, we'll pay them more. And then you're going to get what kind of talent? There's a vicious cycle built into this model. I cut costs in the wrong places where I'm not investing for my talent, for helping them feel connected with the organization. The less connected they feel, the more they're leaving, then I've got to buy my talent. And now I'm bringing in some, swapping out the right talent for the wrong talent.
Are there any takeaways for leading through inflationary times, including for how to navigate that with your colleagues?
The first thing is it's pretty shocking that we have inflation going on and companies have been reporting record earnings, which says what to us? They didn't become geniuses. What they did was they raised their prices more than the cost, which I think is unacceptable. They may say, 'I didn't know how much costs were going up, so I preemptively raised my prices so I could manage my cost.' I find that unacceptable.
Most young executives haven't lived through inflation. They don't know what it's like. They have no idea what sustained periods of inflation are. Like they have no idea that you can or cannot raise prices constantly. People have forgotten about elasticity of demand, basic economics. They've forgotten that sometimes inflation is a great time to imagine. First of all, where are you going to find productivity increases, not cost decreases? Back to what I was saying earlier, it's very different to look at productivity than it is for lowering your costs. And so that's the first place to learn. One of our favorite buzzwords in business schools is innovation. We love innovation. The problem with innovation is innovation comes in two flavors. There's 'big I' innovation, the disruptive, radical, Uber kind of innovations.
Then there are 'little i' innovations, the tiny innovations, what you might even consider part of 'Kaizen' continuous improvement, like an obsession with getting better. A lot of organizations underappreciate how to do that. And so I think it's going to be a period of 'little i' innovation, lots of it both on the employee side with productivity and the supply chain and all that. But also on the customer-facing side. Companies forget that if they are facing inflation, it's not just them who's suffering, it's also the customers who are suffering. If you're a B2B company and you are selling to somebody else, well guess what? They are facing inflation, their customers are facing it. So if you think you can pass the buck on and they'll pass the buck on and they'll pass it on, there's somebody at the end of the chain and that person can hit a breaking point.
You saw Netflix raising prices and losing 300,000 customers. When you have competition and you start to raise prices, that's a sign of arrogance and you pay for it and the market penalizes you. So these are going to be questions that companies are going to have to ask: Is it simply cost-plus pricing and how do I figure out? The part I find interesting in this context is that businesses know how to add or they know how to subtract, they don't know how to do both at the same time. And inflation is a period where you need to learn to do both at the same time.
Read a 2019 Harvard Business Review roundup of ideas for surviving a recession and thriving afterward.
Read our briefing on Gulati’s book Deep Purpose from earlier this year.
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