September 2011: HR Economics What Your CEO Expects You to Understand
For the first August Lunch Break, we talked about HR Economics – what your CEO expects you to understand. We had such a great response we wanted to share this information for September’s Newsletter article.
What is your CEO thinking?
The first and foremost thing on your CEO’s mind is how to increase profitability. Profitability ensures the organization has cashflow to pay its bills, employees, and to invest for its future. Without profitability, the organization cannot sustain itself. But it’s not just about making more money. Profitability is supported in many different ways and can come in all shapes and sizes; each part of the organization contributes differently. Methods to increase profitability include increased market share, increased profit margin, reduction of cost of goods sold, reduction of overhead, creation of new products, etc.
The Conference Board Consumer Research Center conducts a measurement of CEO Confidence™ each quarter. Here are some highlights from the most recent assessment.
Lynn Franco, Director of The Conference Board Consumer Research Center: “CEO confidence cooled considerably in the second quarter, a reflection of a sluggish U.S. economy. Looking ahead, expectations are that this slow pace of economic growth will continue…”
There is, however, some evidence of confidence because 70% of CEOs expect increases in market/demand, especially in durable goods such as autos or airplanes. Of those CEOs that expect profits to rise,
- 57% cite growth in demand
- 20% say profit will rise because of cost reductions
- 20% say they will increase their prices
- and the rest cite new technology as the key driver.
What should you look for?
Your CEO watches several key economic indicators that help them assess the health of their business economy and shape their decisions. If your organization’s reach is local, the CEO is watching global news but focusing on local news more heavily. If your organization’s reach is global, the global news takes precedence. The economic indicators help your CEO develop their perceptions and projections for the future and how the organization can be successful.
Two popular sources of key economic indicators include the National Bureau of Economic Research and the Bureau of Labor Statistics. There are also a variety of research firms out there that specialize in specific industries, so look up these firms to get specific information for your industry. Key indicators either reflect the direction the economy is going (leading) or change only after a change has happened in the economy (lagging).
- A change in a leading indicator demonstrates the direction the economy is going. An example of a leading indicator is the stock market returns or dividends. You will see a decline in the stock market before the economy declines, and it begins to rise again when the economy is improving. The connection is that dividends a company is paying to its stockholders are up if business is good, i.e. a company is paying more money to its stockholders. Stock market returns or dividends are down when a company has less business, so dividends paid to stockholders decrease.
- A change in a lagging indicator is not visible until after an economic change has occurred. For example, the unemployment rate is a lagging indicator because the cause of an increased unemployment rate – a decrease in business – can take two to three quarters to be reflected in the unemployment rate. By then, the economy may already be improving.
What does the future (and the workforce) look like?
Through our own research and understanding, here is what we see happening in the future. We can break it down a few ways:
- For Businesses…selling to consumers:
- They will continue to struggle
- Operate lean
- Experience low profit margins
- Potential contractions in the business for 1-3 more years
Consumers are still struggling with debt, lower pay raises, and increased expenses.
- For Businesses…selling to other businesses:
- Businesses will spend money but not on employees
- Operating lean has increased their profit margin, i.e. reduced overhead and/or cost of goods sold
- Rely more on contractors
- Expect stronger profits
- Will make changes to delivery and infrastructure to position advantageously for the future
Businesses have all tightened their belts and become more efficient in operations. This has created a cash surplus for those organizations not dependent on consumer spending. And while the portion of the economy dependent on consumer spending will impact them indirectly, there are a lot of opportunities for them to improve their bottom line right now.
The changes and shifts in the global economy will shift the current business structure in the areas of technology, flexibility, and trust. Organizations are already investing in increased use of technology to improve their ability to do more with less employees. Software sales are up and employers are reluctant to hire employees because of the long term commitment to them and the uncertainty of the economy.
We believe this will result in a decrease in the trust employees have for an employer and change the way we work. Employers will increase part-time workers and contractors which will result in increased flexible scheduling and remote work. Given to a portion of the workforce, employees will increase their demand for flexibility and remote access and their lack of trust will result in an increased lack of security and increased demand for portable, individual benefits.
With these changes, businesses who are in the buyer’s seat now will be struggling for talent in the future if they don’t embrace the new workforce paradigm. Embracing the new paradigm will require stronger management of performance based on results which can be monitored remotely and support of an employee’s professional development to retain the talent. As an HR professional, changes are coming and it is critical to your organization’s success that you see the writing on the wall and begin developing the infrastructure that will support a positive and collaborative relationship between your workforce and your organization in order to succeed.
This article was posted in HRL’s September 2011 Newsletter.
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