2009

Lehigh

Valley

Workforce

Report

By: Kevin F. Flemming, President Integrity Personnel, Inc. Prepared exclusively for the GLVCC Annual Economic Strategy Program January 27, 2009 Research assistant: Lori Koch

Dateline: January, 2009 In preparing the 2009 Workforce Report, we didn’t find it necessary to produce a detailed analysis of the current economic environment. All of us involved in business, government, and non-profit leadership are very much aware that we’re in the midst of a national economic crisis impacting our region as greatly as the rest of the country. Lay-offs are increasing across all industries. Unemployment claims in the Lehigh Valley have climbed over 50% in just the last 12 months. And we’re seeing local companies and institutions shrink at an alarming rate, with the expectation that the decline will continue through much of the year.

16,980

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Unemployment 11/2007 Unemployment 11/2008

Lehigh Valley Unemployment

So how does one make smart business decisions when so many factors are out of his control? When the squeeze on the capital markets (created by the devaluation of assets) leads to a lack of new construction projects that causes a decline in manufacturing orders, coupled with a drop in consumer

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spending ... how on earth does an organization make any decision with certainty? More importantly, how can we even address workforce and employment questions when many of our organizations can no longer afford the current staff they have?

Facing the crisis This year’s report includes both short-term tactics for managing your workforce today, and a blueprint for making long-term changes to your organizational structure to prepare for the next cycle. Both the short and long term views offered require a belief that the economic cycle will change. Although it is necessary to face the brutal truth (as Jim Collin’s writes in his book, Good to Great) organizational leadership requires a level of optimism about the future. So, as long as you believe that the economy will improve and that your company can survive the current crisis - read on. We’re going to draw you a map to navigate with. You may not be able to see all of the landmarks yet, but we can visualize what the route looks like from the labor and market trends we’re observing today.

Communicate – assess – adjust The first steps to effectively respond to this new economic reality are to communicate, assess, and adjust. Your organization’s current workforce is your greatest competitive advantage and should be the first source you turn to for a recession plan. Communicate with your employees. Tell them what’s happening to the organization. Show them the numbers. If your organization has kept financial and productivity data from your employees in the past (either out of a perceived need for confidentiality or to protect silos of control), stop it! When your employees know the truth and understand reality, they’ll be more willing to help. The communication starts with sharing the brutal truth, but it doesn’t end there.

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Solicit your employees’ ideas. Make them all accountable for thinking about ways to improve the organization’s situation. You will be surprised to find that some of the most creative ideas will come from folks who aren’t in management roles, but do understand their piece of the business. Ask your employees to help.

COMMUNICATE With Employees

ASSESS

Liabilities, Risks, & Barriers

ADJUST

Fix or Eliminate The next step is to assess both your existing capabilities and the alternative resources available for performing operations less expensively. The goal for this assessment is a clear, unbiased picture of your organization’s assets, liabilities, risk, and barriers to survival. Yes, I’m using the word survival because we have to get used to it. The current economic crisis has moved the goal posts on us. And for the near term, we should be taking “growth” off the table to focus on the more realistic goal of surviving the recession. Again, this is a responsibility of all stakeholders, not just top management. Put aside sacred cows and make it clear that everything is on the table. This assessment doesn’t stop with a report. It is no longer acceptable for everyone to agree on what needs to be done and then walk away with a vague idea of how to change while conducting business as usual. The organization must adjust. Once you’ve identified the factors that pose the greatest risks and barriers to its survival, fix them or eliminate them. As harsh as this sounds, it is a much more humane way of managing crisis than hoping the business environment will change before things get worse. Oh, and don’t wait for the perfect solution. If there is a 75% degree of certainty that an assessment is correct, that should be enough to make the corresponding adjustment.

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Communicate, assess, and adjust. This response may just help your organization get through the next 6-12 months. Then what?

The real cost of lay-offs The second leg of the journey we’ve mapped requires a new organizational structure. Its goal is to strengthen your business for the future (post crisis) by creating a more competitive model - one that provides flexibility in both good and bad economies. During recessions, it is almost impossible for organizations to remain fully staffed. This is because human resources are inherently inflexible. Every employee represents an amount of fixed overhead dedicated to specific functions. Since revenues are anything but fixed, an organization’s human resources will never adjust as quickly as needed in times of economic downturn. This severely limits management’s options to respond when facing losses in revenue, and leads to expensive lay-offs that sacrifice the organization’s capabilities. The single biggest problem with the way lay-offs are conducted is that they do not provide alternatives for the loss of capability. Lay-offs are permanent losses of resources that directly impact an organization’s ability to function. So even when the organization starts to hire again, the cycle is unchanged. Headcount may be increased to replenish the organization’s capabilities, until the next downturn. In order to break this cycle of downsizing, companies must rethink the way in which they acquire and deploy the resources needed to run their business. A functional view versus an employee view is required to gain control over both costs and productivity, especially in a downturn.

Identifying functions, not positions Too often, the organization looks at its functional capabilities through the lens of employees. Rather than analyze its critical functions as activities independent of positions, it defines functions through fixed job descriptions. But because we’re limited by the number of people we can afford to hire, positions are designed to incorporate as many singular functions as possible in order to make them cost-effective.

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There comes a time when these multi-task, multi-responsibility jobs become untenable because no one can perform all of the tasks they require well. Productivity actually falls as additional duties are added to an individual’s job - never more apparent than in times of cut-backs. How many of your employees have taken on more responsibility in the past two years? An organization can begin to separate functions from positions by redefining its activities into core, support, and non-core categories. Core activities are unique to the organization - they are the fundamental elements of a company’s business that includes strategic planning, business development, and product or service delivery. Whatever directly contributes to the creation of revenue can be described as a core function.

CORE SUPPORT NON-CORE Executive mgt. Accounting Compliance Strategic planning Marketing Tax reporting Product design I.T. Document mgt. Sales Logistics Benefits admin. Service delivery

Support functions are the things that make the organization run. From accounting to marketing, they enable the company to perform its core activities effectively. Non-core activities are found in every organization and are generally unrelated to driving revenue or profit. These activities, like regulatory compliance, tax reporting, and database management are important but not critical to the success of the business.

Moving from “employee only” to “employee plus” models It is in the support and non-core functions where alternative resources can be found. There are other companies, individuals, and even software programs that can perform them better, faster and cheaper. The more tasks that can be separated and outsourced in this way enable your internal workforce to be more productive in the areas that are critical to your business, from sales - to financial planning - to product delivery.

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What we are describing is not the typical outsourcing model of the past 10 years. That method is limited by its own economics. For example, in order to make the outsourcing of an entire customer service department to a third-party company affordable, a certain volume of transactions must be present, limiting this option to only the largest of operations. Small and mid-sized organizations will find more alternatives outside of the traditional outsourcing business model once they can define their support and non-core functions. And the best news is that those alternatives are already in front of them. There is no rule book that states a company must employ all of its resources. As the traditional employer model becomes ever more difficult to maintain, a company’s ability to outsource functions will contribute to its competitive advantage. Since many non-core and support functions are standardized, there are ever more sources capable of delivering them at low cost and high quality. Current vendors and suppliers; customers; former employees; current employees’ friends; and even schools can provide the new resources for performing these functions. A supplier that already provides a monthly statement to your company for the product it sells, could include your other purchases in its reporting system. Retired employees who still want to work part-time can become on-call specialists for projects. By communicating openly with your existing staff, you can connect with individual professionals or paraprofessionals willing to perform functional-based services at contracted rates. Rather than being limited to one or two channels for hiring the services your organization needs, you can quickly build a network of individual channels from which you can purchase services as needed.

Flexibility is key Both parties in this exchange must be flexible. The providers must be able to think outside of the traditional professional services model (used by accounting, legal, and information technology firms). Performing individual functions versus delivering full service programs requires different economics. Rather than charging for time, these new suppliers may charge for transactions. Or, if metrics are applied to the specific function, they can charge for results.

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The organization must be willing to cede control of activities that were traditionally performed in-house. This eliminates the need for supervisory-level management that exists only to manage the behavior of employees. Rather, it requires operations-level managers who understand how to communicate requirements and measure results. Assuming that the flexibility is present, the total cost of performing that function will always be less than doing it in-house.

3 Forces converging to enable change Why now? Why are we recommending a drastic change to the organizational model at a time of economic crisis when business is facing more immediate issues?

There are three forces converging that make this new method of managing organizational functions no only viable, but potentially game-changing. The first lies in the demographics of the Lehigh Valley’s business community. Dominated by small companies with less than 10 employees each, our region is made up of over 15,000 employers representing every industry sector. The Lehigh Valley reflects the best attributes of entrepreneurial organizations including flexibility, high-performing talent, and recognition of market opportunities.

Small Employers +

Free Agents +

Cheap Technology

This fact provides a welcome environment for

people who can deliver a better way. Combined with the current economic environment, this force alone has the potential to spawn innovation. The second force can be called the “free agent” mentality. Individuals who make up the labor force of 2009 are much more flexible than their counterparts from 20 years ago. This is due in part to demographics: the Millennium Generation is entering the workforce and will eventually supplant its older counterparts. But it is mostly the result of changing attitudes about careers and work-life issues that have been long in the making.

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The number of projected jobs that the average American will hold in his lifetime is continually increasing. In fact, conventional wisdom now reflects that an individual will have at least 3 separate careers over the course of his productive years. Additionally, people see work as more of a negotiated trade with employers, than as an entitlement or right. This independent attitude has led many employees to create their own jobs without relying on established corporate structure. The role of a free agent or contractor is becoming ubiquitous across all industries, and the trend inevitably increases during recessions. Finally, technology takes its familiar place as a force of change. In only the past couple of years, we’ve experienced the magic of being able to access the Internet from our mobile phone - create broadband, wireless networks in our homes with a few clicks - and deploy our databases on virtual servers in cyberspace enabling anyone to work from anywhere. The current communication technology available to all of us at very low cost enables individuals to own the same capabilities as businesses. With simple adjustments, we can have any number of people access order/entry systems - email reports - conduct meetings & presentations with live chat - and answer the phone from anywhere. If there was ever a moment where software enables the “virtual” organization, it is now. And it is necessary.

Revise instead of replace We do not suggest that employees can or should be replaced by independent contractors or services. In fact, the major benefit of this model is that it preserves jobs. By allowing companies to purchase resources to perform its non-core functions, its regular workforce is free to focus on the highly specialized activities that generate the company’s revenue. Even if future downturns cause a reduction in revenue or production levels, cost reductions can be found in the non-core areas of the business. The in-house staff remains both a necessary and valuable resource. In no way does this report specify every element required to implement this type of model. But it offers the concept for your consideration. We believe that organizations will be looking for new ways to maintain operations with limited resources. This path may provide one answer.

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