The Economic Downturn Means That Hiring Freezes Will Soon Decimate Recruiting

Whenever there is a downturn in economic conditions, one of the first knee-jerk reactions that many CFOs and senior managers take is placing a freeze on all hiring, pay raises, budgets, and promotions.

The effect of long-term hiring freezes is particularly damaging to the recruiting function, because “no hiring” generally means that a majority of recruiters will be laid off. Historically, budgets for recruiting have been cut so low that the function is literally decimated, making it rather difficult for companies to resurrect a decent function when the economy swings up.

Many executives think that the decision to institute some sort of resource freeze is one that helps the organization because it contains costs; however, the opposite is more often the case.

Poorly thought-out freezes that impact talent acquisition and other talent-management activities may actually harm the organization by:

• Driving increases or vacancies in revenue producing/impacting roles that decrease revenues beyond any cost savings.
• Driving increases in employee burnout/turnover.
• Missing out on new talent opportunities (i.e., not be able to hire a superstar that becomes available).
• Decreasing an organization’s capability/capacity to innovate.
• Damaging the employer brand making hiring more difficult when the economy returns.

Rather than waiting for the inevitable announcement of a freeze, recruiters need to be proactive and preempt any such silliness long before it occurs by making the business case for leveraging this time to re-architect the talent acquisition function, upgrade its strategic programs, and trade up the talent population while salaries and vendor costs can be negotiated down significantly.

(Incidentally, you can tell when a hiring freeze is imminent because they are almost always preceded by the infamous “paper clip memo” from the CFO, which limits the purchase of office supplies, magazine subscriptions, and travel).

Because every organization is unique, there is no one magic way to structure the business case, but I have put together a list of arguments that you can select from:

A) Negative impacts on revenue and costs
Obviously, not expanding your staff or keeping open positions vacant can save payroll dollars in the short term. However, such savings may actually present a false reality because freezes have many other unintended consequences that CFOs often fail to account for:

1. Lost revenue. Across-the-board hiring freezes mean that critical revenue-generating and revenue-impact positions go unfilled. Obviously, when there is no one in a revenue-generating position, there is a lost opportunity to generate revenue every day that the position remains vacant.
2. Customer impacts. Frozen budgets and understaffing can stretch your employees. This means that other employees must now do double duty because replacements can’t be hired. This may also impact quality and send a message to your customers that your firm is slipping as constrained employees sidestep process elements and cut corners. Both can negatively impact your product brand and future sales.
3. A limit on growth. Within most large firms, even during tough times some businesses units are growing, while others are shrinking. By freezing hiring “across the board,” you negatively impact your rapid growth and top revenue generating divisions. This limits their ability to continue to grow. In global firms, some regions are likely to be growing despite the downturn and an overall freeze will threaten your competitive position.
4. Headcount replacements are expensive. In the end, few hiring freezes actually end up saving money because budgeted headcount employees are often just replaced with consultants, temps, interns, and other “off the book” spending. In some cases, these alternative consultants and workers are actually more expensive than regular employees, leading to a situation where overall “labor costs” don’t go down at all. Facing employee shortages, some managers increase the use of overtime in order to get the work done, but at time and a half, this solution is relatively expensive.

B) Retention impacts

1. Frustrated employee turnover. Freezing resources means stagnation, and when opportunities are limited, they are likely to seek employment elsewhere. Freezing pay, promotions, travel, and/or training can also limit employee growth and learning, which will also increase turnover, if not immediately, at the first sign of opportunity.
2. It encourages your competitors. Hiring freezes are visible to outsiders on your website and the news of their existence spreads rapidly. These freezes send a message to your competitors that you are “weak” and struggling. This may cause them to increase their efforts to recruit away your employees and more often than not, your customers.
3. Freezing deadwood. Unfortunately, not being able to fill vacant positions causes managers to slow down or even cease their efforts to get rid of their deadwood employees. “Carrying” these low performers leads to lower productivity overall, but also weakens your managers by not forcing them to confront low performers. It gives managers an excuse not to make tough people decisions, which may also eventually weaken their decision making in product areas also.
4. Freezes frustrate “idle” recruiters. The best recruiters you are able to keep on your staff will invariably get rusty during hiring freezes. Having idle recruiters is a waste of money but it can also foster turnover among your recruiters who love action.

C) Missing out on talent opportunities

1. Exceptional talent. Across-the-board hiring freezes mean that when a few exceptional individuals like “Tiger Woods” enter the talent market, you will not be able to consider them. As a result, you’ll miss out on exceptional talent who could really make an impact. If your firm doesn’t capture this exceptional talent, other firms will.
2. Off-cycle recruiting. During tough economic times, both the amount and the quality of available talent will greatly exceed the available talent during boom times. Because during lean times, few firms are hiring, there is minimal competition. Together this means that a firm can now successfully attract experienced and college hires that their weak employment brand, pay rates or location wouldn’t normally allow.
3. Weakened recruiting capability. Extended hiring freezes invariably weaken the recruiting function. This loss of recruiting capability can impact the business because the remaining recruiting staff won’t have the ability to successfully recruit and land “in demand” candidates for the few positions that do become open.

D) Reduced innovation and technological capability

1. Reduced innovation. Budget freezes in particular can rob your innovators of the resources that they need to innovate, just as hiring freezes prevent you from recruiting new innovators. As a result, the rate of process and product innovation may decrease significantly during hiring freeze. In addition, freezing promotions and pay increases may limit your innovators motivation and willingness to be creative.
2. Impacts on technology. Because technology is constantly evolving and improving, hiring and budget freezes will directly limit your ability to attract new technologists and the needed new technologies.

E) Additional negative impacts of freezes

1. Employment brand impact. It signals a stoppage in a firm’s growth, which can impact your firm’s employment brand as a great place to work. This can make future recruiting more difficult and expensive.
2. Stock price impact. A freeze sends a message to analysts, customers, suppliers, and employees that your firm is not in a growth mode. Long or frequent “pauses” in recruiting may also send a stronger message that the company is in trouble, which could further hurt the stock price, which is likely lower anyway as a result of the weak economy.
3. Recovery time. Hiring freezes often mean that the recruiting function will be decimated. The function cannot be rebuilt overnight after the freezes are lifted. Many managers wrongfully assume that recruiting is a pure production function, one which you can put money into today and get results out tomorrow. While recruiting truly is a production function, it often requires significant ramp-up time, which many organizations fail to plan for. Refilling the “talent pipeline” with candidates after a freeze might take months, which can end up making the freeze last even longer than intended. In addition, “exploding out of the box” when the economy improves will also be more difficult.
4. Excessive early spending. Anticipating freezes often encourages hiring managers to hire “a bunch” of people early (whether they are needed or not). They do this in order to avoid “losing” the positions later in the year when hiring and budget freezes are generally introduced. In the same light, rumors of possible freezes can make managers and HR paranoid and to do “immediate panic” hiring the moment they hear a rumor about an upcoming freeze. They might also make rush decisions during a current hiring process, in order to complete it prior to the institution of a forthcoming hiring freeze.
5. Lower referral rates. Freezes may cause employees to hesitate before making referrals. They are hesitant partly because budget, promotion and pay freezes make the organization a less desirable place to work but also because a freeze may make their efforts fruitless because it diminishes the chances that their referrals will soon be hired.
6. More time spent on administration. Most across-the-board freezes are really not true freezes. Top managers almost always leave “exceptions” open. As a result, they don’t really “stop” hiring, they just slow requisition approvals and make them more painful to get approved. A large amount of a managers (and HR’s) time is wasted “getting around” these freezes and justifying “exceptions.” It can also give managers a bad taste for hiring of any kind, which may result in managers not devoting much time to the hiring process once the regular hiring process returns.

Action Steps

Rather than instituting across-the-board freezes, educate managers about the different options they have for cutting costs and increasing revenues:

• Focus on budget dollars. When it is important to slow down expenditures, it is often better to do it through budget control (controlling dollars) rather than through a hiring freeze or headcount tracking. In addition, always look at the revenue impacts whenever costs are cut.
• Increase internal movement. Managers need to increase the impact of their current employees by developing plans to transfer people internally from low return areas to those with higher return.
• Use incentives. Managers should consider offering short-term incentives to employees for increasing productivity or for reducing costs. Employees are often better equipped to judge where costs can be cut with minimal impact on productivity.
• Prioritize positions. If a manager decides to use a hiring freeze, they should limit the freeze to pre-identified non-key positions. Otherwise, a vacancy in a critical job can cause a significant loss in revenue and negate the projected cost savings from the hiring freeze.
• Demand metrics. If freezes are used, track metrics to determine whether overall costs are actually reduced by the freeze.
• Performance management. Managers should be encouraged to periodically fire low performing employees first, before seeking replacements.
• Rapid growth divisions. These critical regions or business units should be exempt from across-the-board freezes.
• Continuous churn. The new realities of talent management and business are that the old pattern of resource freezes and then layoffs needs to be broken. In a global economy, where firms need to be fast and agile, the new model is for firms to simultaneously hire and release workers in different areas. Smart managers must learn to continually add workers in areas of growth and innovation, while continually redeploying or releasing workers in areas of low ROI.

Final Thoughts

Any review of history will reveal that the majority of wealth in modern civilizations is more often than not created during times of significant economic crisis.

Opportunities abound for those organizations that are truly strategic, but as we all know, lots of people talk about being strategic but few really are. Now is the time for talent management to step up and proactively re-engineer antiquated practices and programs, and to embed talent management activities throughout core business processes while the organization can accommodate change.

If you wait until things are moving fast once again, you won’t have time to be strategic; you’ll be too busy catching up!