RealTime Leadership

Revenue is down, costs are increasing and your operating income is being squeezed.  When you look at your Profit & Loss Statement, one of the largest line-items (maybe THE largest line-item) is labor.  What do you do?

In the past, the conventional wisdom, especially in the United States, has always been to reduce the workforce.  In fact, the U.S. economy has been widely praised for its flexible labor markets.  U.S. companies are thought to have a competitive advantage over European and Japanese firms because they can reduce their workforce with relative ease. 

However, in the past few months, as U.S. companies have come to terms with the fact that we are twelve months into a recession that might get worse before it gets better, some corporations have come to a different conclusion.  A recent Wall Street Journal article highlights the approach of reducing salaries across the board versus lay-offs.

It could help avoid the disruptive and expensive process of firing lots of workers in a trough — and the added cost of rehiring them when the recovery occurs. FedEx’s cuts for its better-paid employees also might give management credibility to ask for cuts elsewhere if the recession drags on.

The article also cites three macro-economic benefits to this policy; (1) Aggregate demand remains stronger when all employees have a job, (2) banks benefit because fewer consumers default on mortgages and credit cards and perhaps the most important (3) the price of labor re-adjusts, just like the price of raw materials and other supplies that come down during a recession.  And this last point helps prepare an organization for the inevitable recovery.

Now, if you do elect to take this route, you’ll need to take extra steps to ensure that employees remain engaged.

Three hundred years ago, it was a well-known and widely held belief (thought to be indisputable truth) that all swans were white.  With the discovery of Australia and the subsequent sighting of black swans, a “truth” that was confirmed by millennia of observation by humans was completely invalidated.   Interesting trivia, but what does this story have to do with leadership?   It turns out, quite a bit. 

A Black Swan is a low-probability event that is very difficult, if not impossible to predict in advance, and which has a massive impact.  Think of 9/11, the outbreak of World War I, the Great Depression and most recently the world-wide economic crisis.  

In his 2007 book, “The Black Swan“, Nassim Nicholas Taleb claims:

Our world is dominated by the extreme, the unknown and the very improbable (improbable according to our current knowledge) – and all the while we spend our time engaged in small talk, focusing on the known and the repeated.  This implies the need to use the extreme event as a starting point and not treat it as an exception to be pushed under the rug.

My favorite story from the book is that of the turkey (I guess Taleb likes bird stories).  Think of the life of a turkey.  For many weeks and months the turkey is fed by the farmer.  Each day, the farmer brings the turkey more than enough to eat.  In fact, the farmer is so generous with the serving portions that the turkey is getting fat!  Each meal delivered by the farmer confirms for the turkey the farmer’s great love and gratitude for the turkey.  Until one day, most likely in early November, the farmer arrives not with a meal but a butcher’s knife and…okay, you know how the story ends.  Basically, the turkey meets a black swan. 

The challenge for leaders is to figure out how not to be the turkey.  But how is that possible? Black Swans are impossible to predict, right?  Yes, but that doesn’t mean we just pretend they don’t exist at all.  Taleb offers some advice:

1. Don’t be fooled by narratives.  After reading The Black Swan I realized that I often accept narrative explanations for causation when in truth, I am dealing with a system that is much too complicated to be described by simple models. 
2. Remember Extremistan.  Figure out what kind of system you’re dealing with.  Some systems, Taleb calls them Mediocristan, are not subject to Black Swans, while other systems, called Extremistan are quite vulnerable.   

Think of the credit crisis.  For many years bankers and economists observed housing prices increasing steadily.  After a while, it was widely assumed that prices could only go up.  Investments were made, money was lent and mortgage securities were valued all based on this presumably rock-solid assumption.  Until one day prices stopped going up.   According to Taleb:

Our inability to predict in environments subjected to the Black Swan, coupled with a general lack of awareness of this state of affairs, means that certain professionals, while believing they are experts, are in fact not.

Don’t be a turkey.

By 2006, one could find a few early-adopter (and very brave) CEOs using blogs to communicate with their employees, customers and shareholders.  Although these were high-profile and often successful examples of leaders using this new media to communicate, it left many rank-and-file employees scratching their heads, thinking to themselves “well, that is interesting for a CEO, but I don’t ever see myself blogging at work.”  Think again.

As it turns out, blogging is a very effective management tool.  It is a convenient method for managers to provide consistent updates to employees on the latest trends, ideas, projects, accomplishments, problems, articles and books.  Some managers resist blogs (both writing and reading them) because they view blogging as contributing to the very real problem of information overload.  They see blogs as one more annoying interruption in addition to email, voicemail, conference calls and the like.  

I think this kind of resistance is a mistake.  In fact, blogging, when done correctly, reduces information overload.  There are several reasons why blogs are powerful communication tools and will be a required skill for future leaders:

1. Subscription. The way we interact with blogs is different than email, voicemail, newsletters or anything that has come before.  This is a powerful change.  One factor contributing to this is RSS, or really simple syndication.  Because employees can “subscribe” to blogs through RSS, they can read and interact with blogs on their own time.  This avoids the interruption factor that can be so deadly for productivity.  In addition, newsreaders, or aggregators, help people monitor many subjects at once.
2. Preservation.  Blogs are preserved and become a repository for ideas and knowledge.  What is written in a blog is maintained for the historical record and searchable.  Ever try to find and retrieve a great email you wrote three years ago?  Overtime, a blog becomes a searchable database of ideas cross-referenced and linked to other databases.
3. Connectivity.  Blogs reference other blogs, websites, podcasts, photos, books, and news articles.  This allows knowledge and ideas to evolve rapidly, and it connects people.  Although links can be embedded in email, it just isn’t the same.  For example, it is very difficult for one email to hyperlink another email.  Ever try to link to the great email you wrote three years ago that you can’t find?

We are still in the early stages of understanding how to harness blogs, but I predict that effective business leaders of the future will be masters of the craft, and cutting-edge companies will work blogs into their culture to drive innovation and engagement.