Thriving Through Economic Uncertainty

Thriving Through Economic Uncertainty

By | June 3, 2022

Investing in your leaders now is the key to thriving through the economic uncertainty ahead

After years of a smooth-sailing economy, there are signs of rougher waters ahead. Experts, including former Goldman Sachs chief executive Lloyd Blankfein, Wells Fargo CEO Charlie Scharf, and former Fed chair Ben Bernanke, have recently cautioned that the country could be at risk for an economic downturn or even recession.

While it is impossible to know the accuracy of these predictions, business leaders are struggling to understand how the economic uncertainty of the moment will change the near and long-term global business landscape.

Although some will instinctively respond to fears of a recession by cutting costs across the board, including on HR and talent development, studies show that companies that invest in targeted selection and leadership development are better equipped to weather an economic downturn, recover faster, and come out more profitable in the long term.

The Storm at Hand and the Storm Ahead

The world has experienced profound change in recent weeks and months, and those changes continue to evolve. As individuals navigate record inflation and economic uncertainty, businesses and their leaders are looking at the uncertainty ahead.

Goldman Sachs revised its forecast for second-quarter U.S. economic growth down to an annualized rate of 2.5 percent. And after a period of unprecedented economic expansion, the threat of recession is real. Bloomberg Economics now rates the chance of a recession within the next year at 53%, the highest reading since the U.S. exited the Great Recession in June 2009.

HR and Talent Development Budgets are on the Chopping Block

Faced with economic uncertainty, many companies are preemptively slashing budgets. During the 2007 financial crisis, HR and talent development budgets took a massive hit. Although HR and talent development have been early targets for cuts in past crises, a Gartner report indicates that “investing in these areas can have a long-term impact on an organization’s performance.”​

Drastic Cuts Make a Bad Situation Worse

In the wake of the 2007 financial crisis, the Harvard Business Review published a study of 4,700 public companies during three global recessions in the periods between 1980-2002.

The results are not what you’d expect. Companies that made the first and deepest cuts were the least likely to succeed post-recession, and many failed to recover their pre-recession value. Companies that invested too aggressively fared similarly badly.

The 9% of companies that came out of each slowdown stronger than they went in were those that mastered “the delicate balance between cutting costs to survive today and investing to grow tomorrow.” At the end of each recession, these companies not only outperformed their own pre-recession financial metrics, but bested their rivals by at least 10% in terms of sales and profit growth.

Investing in Leadership Selection and Development is Critical During and After a Crisis

Leadership matters, never more than now. The strength of an organization’s leaders has an outsized impact on a myriad of outcomes, from employee engagement to productivity, customer satisfaction, sales, revenue, and the company’s ability to outperform its competition. Selecting the right leaders for your organization and providing them the development and support they need to succeed is absolutely critical for your company to remain competitive during and after this crisis.

A longitudinal study of 359 public companies examined the relationship between selection, development, and financial performance before, during, and after the 2007 financial crisis. As seen in Figure 1 and Figure 2 below, firms with more rigorous selection and leadership development practices not only performed better pre-recession but recovered faster and outperformed their competitors when the recession was over. This study controlled for external variables, allowing the researchers to pinpoint the effect of these investments even after accounting for factors like company size, industry, and location.

In the years before the financial crisis, the data show that leadership selection and development contributed to profit growth by enhancing productivity and creating resource slack that helped firms weather the storm. In the years after the crisis, investing in building a bench of high-quality leaders helped firms adapt and prosper.

Figure 1 – Investment in Leadership Selection Effect on Recovery and Profit Growth

Figure 2 – Investment in Leadership Development Effect on Recovery and Profit Growth

Balancing Investing in Development with Operational Efficiency

How can companies balance operational efficiency with investing in the future? By investing in the selection and development of their leaders.

Leader selection is critical. The cost of replacing a failed leader is 10x his or her salary, even excluding those executives awarded “golden parachute” severance packages, and the 2007 financial crisis made clear the true cost of poor quality leadership in a crisis.

In terms of development, the ROI of executive coaching is well documented. Studies have shown that coaching can produce an 88% increase in individual productivity. Additionally, the mean ROI for companies investing in coaching is 7x their initial investment, with more than 25% of companies reporting ROI between 10 to 49 times their initial investment.

Unfortunately, for every executive coach creating value for their clients, there are scores of unaccredited, inexperienced coaches doing the opposite.

Maximize the ROI of selection and development investments by focusing on providers with the necessary experience and infrastructure to help organizations navigate this tumultuous time. And, make sure you’re working with a provider that allows you to demonstrate results.

Into the Unknown

In the days, weeks, and months to come, the impact of today’s economic currents will unfold in ways we cannot imagine. The uncertainty of the present makes it exceptionally difficult to look ahead. But as past crises have shown us, looking ahead is more important now than ever. And companies that do will emerge better and more competitive than they were before.

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