The Hidden Cost of Human-Capital ‘Savings’

When governments must reduce their workforces, they need to find ways to minimize the damage to long-term performance.
by | November 16, 2011

Almost half of the states accomplished budget reductions in fiscal years 2011 or 2012 by laying off employees, according to the National Association of State Budget Officers. And the Labor Department reports that local governments have shed nearly a half-million workers since 2008. The implications of this tactic--for organizational performance and strength of governments' human-capital pools over the medium- and long-term--merit consideration. But public agencies can weather the challenge with effectiveness intact and resilient workforces in place.

Reducing human-capital expenditures is an understandable--indeed, often unavoidable--response to budget shortfalls. However, the potential damage to public agencies' long-term performance results not so much from cost-cutting itself but from the manner in which it's accomplished. Governments would be well advised to make necessary cuts with an eye on strategic goals: maintaining trust between employees and management; ensuring that actions are perceived as fair; and continuing development of the employees who are retained so that the capacity is in place to maintain performance over time.

Two highly counterproductive, but not uncommon, pitfalls of public-sector staffing reductions are failing to pay attention to performance while relying on attrition and layoffs and neglecting to maintain and develop human capital.

Managers--out of compassion, because of political considerations or for other reasons--often attempt to cut personnel costs without resorting to layoffs, instead relying on attrition. Reducing staff by leaving vacant positions unfilled is not strategic, but rather results from individual-level decisions to leave. Personnel reductions through attrition are essentially random, not demonstrably linked to performance implications. If there is an underlying driver of individual decisions to leave (a particularly weak manager, for instance, or strong external demand for specialized skills such as programming), this bias may leave agencies poorly positioned to deliver on their mission. Morale among retained employees can erode quickly, especially if furloughs accompany increased workloads.

Even when layoffs do occur, decisions are not always informed by data on how unit or individual performance may affect organizational outcomes. They frequently unfold in accord with collective-bargaining agreements that require factors such as seniority to dictate which employees remain. Managers may be left to fill positions with employees who have inadequately developed skills and competencies or overload retained employees with work. The long-term consequences to performance--not to mention workers' health--are rarely positive.

And just as there is a tendency to defer maintenance for physical capital, spending to enhance or extend employees' skills and competencies through training and development is often reduced or eliminated. A not-uncommon (if mistaken) notion is that such investment is a luxury or a perk. The irony here is that task and--especially management--skills are more important, not less important, when organizations must deliver a fixed or increased level of services with fewer resources. Managers may need particular support and skill development in areas such as communication, trust-building and employee coaching to maintain performance and preserve a capable, motivated staff so that effective agencies emerge on the other side of fiscal difficulties.

The need to constrain or reduce human-capital expenditures starkly illustrates a dilemma all too familiar in public organizations: Short-term pressures and longer-term objectives often are in conflict. Decision-makers needing to cut a current-year budget by 10 or 15 percent may be biased toward perceived "low-hanging-fruit" solutions, such as relying on attrition or all but zeroing out training and development. Using evidence and performance data to consider out-year implications of current-year cuts--asking how spending can be reduced in a way that maximizes performance in the long run--can support decision-making that is more consistent with achieving outcomes.

On the personnel front, managers should diagnose attrition patterns and assess these in light of strategic priorities. Reducing the workforce through attrition may have unforeseen costs. As hard as it may be to make such choices, in some cases applying layoffs in a lower-priority area is a superior option to allowing attrition to compromise strategic priorities. Emphasize communication and fairness, so that trust is maintained among employees who are retained.

On the training and development front, public leaders should apply creativity and innovation and consider substitutes to traditional service delivery. For example, strategically assign challenge assignments as on-the-job training, use external providers judiciously while promoting leadership competencies via internal resources (such as peer groups or senior mentors), and ensure that managers are diligent about their performance-management and coaching responsibilities.

While non-strategic cuts in human-capital expenditures can get governments through an immediate crisis, they also can leave agencies poorly positioned to produce results during the crisis and compromise capacity to deliver effectively once the crisis has passed. Performance-based approaches can make for better workforce decisions, even in the face of budget challenges.

(Thanks to my colleague Rita Hilton for suggesting this idea and for her substantial contribution through sharing her expertise in this area.)

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