Pay-back – Making Long Term ‘Workplace’ Decisions in Times of Uncertainty
There is no doubt that many organisations, and leaders, are faced with some challenging decisions to make in terms of resources and workplace issues, given the uncertainties over the last 9 months. However, when it comes to considering resourcing options and the possibility of restructuring, it is advised to stop, take a breath and think about the longer term implications of decisions made at such an uncertain time. Here Brendan McCarthy, Senior Partner with Stratis Consulting takes a closer look at this issue.
To Begin, Some Questions Worth Asking
Are some organisations over-reacting, doing knee-jerk reactions or seeking permanent solutions to temporary problems? Have some organisations forgotten to think longer term and apply basic business logic and financial planning?
How should one calculate return-on-investment? By definition, a return on investment means achieving a return that is greater than the investment, and hopefully, at a level that justifies the investment. Remember, the return will only occur at some future point in time. For this to happen the future needs to be predictable. What is a reasonable period to break-even or to start to gain and receive payback from an investment? What sort of rate of return should we be looking for from a capital investment? These questions do not have definitive answers and factors like the cost of money alternative returns on investment can play a pivotal role in decision making.
Most importantly the confidence one can have over the entire period under consideration should determine if it is worthwhile. If you were to buy a warehouse, in the current market, and were getting an annual rate of return of between 5 and 10%, for many, this would be considered a good investment. In addition, if you took out a 20 year loan on the property there would also be the possibility of capital appreciation on the property, given the move to online sales and the continuous growth in distribution centres. Would you be as confident if it was an office building instead of a warehouse? With social distancing, quality of life issues and most importantly the move to working from home, would you be as confident in predicting rental income and capital value over a 20 year period?
A Period of Unprecedented Uncertainty
The economy is currently undergoing a period of unprecedented uncertainty with potential extreme consequences (good and bad) for many, all of which make it virtually impossible to have confidence in any plan, even in the short term, never mind medium or long term. As a general principle, in such times, it is essential that organisations are agile and flexible to respond to any and all changes that occur. Demand, for many, is likely to be on a roller coaster for the next year and staffing and the organisations cost base must be able to respond in a rapid and proportional way.
The most obvious and least costly way of achieving this is through the application of targeted short time working or lay-offs. This option will meet with least resistance, and coupled with government decision on wage subsidy and temporary changes to redundancy legislation, it provides an immediate short term solution in times of uncertainty. The use of short time working is the least risky option that achieves instant savings with no investment needed.
An Argument for Temporary Solutions
There is a strong argument that organisations should be seeking temporary solutions in uncertain times (uncertainty implies that whatever currently exists is not permanent). Unless of course, that the decision is to get out of the business entirely either because the organisation cannot afford to wait or does not believe there will a viable business in the foreseeable future.
It is difficult for any organisation to justify making permanent changes, often at a high cost, at this time. If an issue is referred to a third party the organisation can expect that their logic will be scrutinised and challenged. Remember that redundancy is a form of dismissal and the Unfair Dismissals legislation applies. This means that proper processes and procedures must be followed and dismissal is a remedy of last resort.
Payback Periods in Times of Uncertainty
A cost benefit analysis of any restructuring proposals in time of uncertainty must have a very short payback period. To spend significant amounts of money restructuring that has a pay back of over one year does not make sense when we do not know what the position will be in 3 months, never mind 12 months. In addition, given the level of uncertainty that exists, you will not know what else might happen and the implications of this. The situation we are in now is unprecedented, which means, we don’t know what the future holds.
If an organisation decides to reduce its permanent workforce this is often achieved through a voluntary severance scheme. To make this attractive one needs to offer in excess of the statutory entitlements (two weeks per year of service, plus one week to the total, and subject to a ceiling of €600 per week). Two issues arise, to make it attractive in the current climate could be expensive and secondly, who are the people most likely to volunteer to leave, your best or worse staff, those with shortest or longest service? There are a lot of variables involved but pay-back could be up to two years. Is it sensible to invest today in something that will have significant cost (especially cashflow implications) and only begin to achieve a positive return after this period? Is this the best use of cash and resources?
Compulsory redundancy, as everyone knows, can be a “red flag” as far as unions are concerned. Threats of industrial action are almost a certainty where unionised members are involved, unless where every other option has been explored. There will be challenges to the principle of compulsory redundancy which may be difficult to defend. In addition, given the government supports in place and the level of uncertainty that exists it will be argued that other options exist. If compulsory redundancy is contemplated and if you get over the industrial relations issues there may be legal challenges on the basis of the redundancy itself, selection and discrimination.
Many of these issues could play out in the media and have reputational implications for the organisation.
How confident can organisations be on their needs in 12 months’ time and how it will operate, what structures should be in place, what cost base will be needed to be economically viable, what staff numbers and competencies will be required?
At Stratis Consulting we advise caution and ensure that the correct and considered approach is taken by clients, at the right time, in the right way, to suit the scale of the challenge being faced. There is no doubt that, for many organisations, there is an urgent need to reduce the haemorrhaging of scarce resources. Organisations need to protect themselves and have the flexibility and resources to respond when greater certainty exists.
Things can change quickly, for the better as well as the bad, so take a breath and think logically and strategically for the longer term sustainability of the business.
If you would like to talk to us about any of the above issues or about engaging your people through the period ahead, please get in touch with me at email@example.com or any one of our Partners.
‘Leading People Strategies’
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M: +353 (0) 87 2548167
Disclaimer: The information in this article is for practical guidance only and does not constitute legal or specific case advice. The answers to specific situations will vary depending on the circumstances of each case. This is not a substitute for specific professional advice relevant to individual circumstances facing your business.