In mid-2023 there was a whiff of uncertainty in the Australian business community. Many organisations responded by squeezing costs and hunkering down. This editorial argues that a cut-and-demoralise strategy damages the human capacity for high performance long after conditions improve.
A nervous mid-2023
In June 2023, several regional banks in the United States were close to collapse, with major banks depositing billions to stabilise them. In Australia we faced the worst housing crisis on record, with rents rising in excess of 50 per cent and people facing homelessness. France raised the pension access age and met riots; the United Kingdom looked set to follow. The Reserve Bank paused rate rises, then recommenced them soon after.
Unemployment had fallen towards 3 per cent and underemployment had reduced significantly. Job vacancies were softening, but monthly job postings remained 15 per cent or more above the previous year. The economy was steady, yet business confidence had turned down and there was talk of a consumer recession.
Overreaction does the damage
Times were not particularly difficult for the average business. But overreaction to the sense of difficult times ahead began to cause substantial damage to the ability of businesses to respond if conditions improved — which, with hindsight, we know they did.
In times of uncertainty and low growth, many organisations downsize, outsource, restructure, cut or defer discretionary and capital expenditure, and find other ways to cut employee costs.
People are the engine room
For most organisations, and particularly service-based businesses, their people are the engine room of performance. Adopting a cut-and-demoralise strategy is not just damaging to organisational capacity, it is damaging to the human capacity for high performance.
Many employees see cost cutting as a breach of trust, and it is extremely difficult to recover from.
Cutting into capacity
Insync Surveys, whose high performance research studied responses from 100,000 employees across 200 Australian organisations, observed that many organisations had cut so deeply that there was little left to remove without cutting into organisational capacity. Their advice was that organisations wanting better performance and productivity need to change their cost cutting habits.
As history now demonstrates, those who cut early and deeply struggle to recover from the exit of employee trust.