Think before you fire: The cost of replacing IT talent

There’s currently a certain sense of déjà-vu within the IT community, as companies look at shaving even more cost out of a function that has been battered since the 2001 dot-com bust. However, when we look at the lessons of the past, you do have to question companies which decide to sharpen their knives once more when they address their IT costs. Companies need to offset the cost of every layoff with the cost of replacing that talent when the economy improves. It is not so much who is left standing, but rather who is in position to grasp the brass ring of prosperity when it returns.

If economic conditions improve in 2010, then the amount of costs saved by releasing an employee may only be $50-100K by the time all the lay-off costs are incurred. How can you put a price on replacing the inherent business knowledge of that staff member when you re-hire a replacement? It may take another year or two to get the replacement up-to-speed, and will not only end up costing you more, but may also impede your executives from accessing critical data in a timely fashion. The overall cost of replacing that staff member could easily be three times the costs saved by laying her off. And these easily-identified direct costs are only the beginning; the costs incurred to your culture and morale can prove even more damaging.

There are lessons to be learned from those who did it right and those who failed to do so during the recession of 2001. The frequently cited observation by George Santayana warrants consideration, “Those who do not remember the past are condemned to repeat it.” Furloughed IT employees in the RIF of 2001 were often reluctant to return to their previous employer. Having been viewed as expendable, the trust and bond between the two may have become a casualty. Often the company belatedly discovered the employee was not at all expendable.

Companies often failed to realize that internal technology is an ongoing work in progress with parts of the past moving forward into the future. With essential team members no longer on board, projects bogged down due to a loss of internal expertise. If new employees were brought in, there were reduced capabilities with a learning curve to scale brought on by a unique IT environment.

IT is the glue that provides the connectivity within an organization and stakeholders. Every environment is unique, often featuring proprietary software and customized legacy systems. The complexity and diversity that results are best left in the hands of those who understand and are familiar with it. In 2001 firms laid off across the board only to discover that when times improved and IT projects resumed, many key people needed to implement them were no longer available. When entering into new engagements, some companies discovered that the chickens had come home to roost and that they were in the coop.

Whether outsourcing or aligning with business partners, management teams are built involving IT. And while outsourcing provides access to technical skills to support your tactical software support and maintenance, it rarely provides the inherent understanding of your business processes and environment that several of your key staff have.

Companies facing the challenges of 2001 with the foresight to prepare for renewed business opportunities in the future fared well. Instead, being reactive to the recession, they became proactive in their business. As opposed to across the board cuts, they applied due diligence and root cause analysis into their business. They prioritized strategically. In so doing, they were able to make adjustments to reduce unneeded expenses. Much of this involved taking advantage of global labor arbitrage for routine work. They also invested in initiatives to improve the business, often involving technology. It became apparent that the success of these initiatives was very much tied into keeping their key IT in-house people on the team.

There is a form of a parable concerning competitors who are prepared and those who are not. Two friends were walking in the forest when a bear came after them. They both turned and fled. One was not in very good condition and he breathlessly called out to his fit friend who was jogging along ahead, “You need to outrun the bear!!” “No I don’t,” came the reply. “I only need to outrun you.”

The current economic morass will not produce winners, but it will produce companies that are in more favorable positions to take advantage of opportunities at the expense of their more sluggish competitors when times improve. Cutting people that shouldn’t be cut can be cutting your throat.

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19 Comments

  1. Stephen Cohen
    Posted February 11, 2009 at 9:17 am | Permalink

    Right on! The main reason we’re in this mess in the first place is because companies focus too much on the next quarter, not the next year, or two years.

    Knee-jerk staff layoffs rarely benefit firms when they have to hire back their staff in the future and it always impacts staff loyalty and culture. I prefer pay-reductions and othe means of cost-reduction, if firms can deploy these measures effectively,

    Stephen Cohen

  2. John Dough
    Posted February 12, 2009 at 7:09 am | Permalink

    Also agree. I was a pink-slip recipient in 2001 as well, and was on the bench for 9 months afterwards to boot. Unlike many of my colleagues, I stuck it out and stayed in IT and can actually say I’m in a better place now than I would have been if I didn’t do some soul searching and look at other specialties in IT (went from network admin/support to security).

    That being said, I wound up going back to the company that laid me off a few years later. But for a much higher salary and position. When a better opportunity came along, I felt no compunction in leaving that company. Their loyalty was to their bottom line, why shouldn’t mine be? Tough lesson to learn after being a loyal employee for 12 years, though.

  3. Ed Morgan
    Posted February 12, 2009 at 7:11 am | Permalink

    Here in Detroit, your just wait your turn on the un-employment roles. Prolem is, when you are in you late 50′s, doesn’t matter what you know or what your experience is (unless your a VP or CIO). They just don’t want you back. Much cheaper they think to H1B it.

  4. Horses reader
    Posted February 12, 2009 at 7:29 am | Permalink

    I’m not saying that there is never a cause for a lay-off, but I am saying that you have to be very careful you don’t cut necessary knowledge out of your organization; as Phil points out, you might not be able to get it back.

    Honestly, I know that I would have to think twice before returning to an employer who laid me off. I would be wondering, “how can I trust them with my family’s financial future?”.

    I suppose a large raise would be required to even interest me in returning, because they have already proven themselves untrustworthy. Even then, I doubt I’d work the kind of extra-hours I do now … because I would know that any loyalty I show to that company is *not* going to be rewarded.

    A lay-off essentially says, “we’d rather compete against you than employ you.”

    Personally, I’d accept that at face value and take my skills and knowledge elsewhere.

    Just my $0.02 after 30+ years in the business.

  5. Sean Lally-Randall
    Posted February 12, 2009 at 8:30 am | Permalink

    Until we resist tactical pressures from the financial markets to instantly reduce costs, change direction, jump on the next band wagon we are doomed to repeat past mistakes.

    Procurement resources are a fine example where companies love hate, or rather disinterest has resulted in procurement having one of the highest attrition rates of any function. The public sectors a prime example of where this disinterest and tactical short term approach has skewed the resource market. Most departments can no longer find good full time procurement resources because their all in the interim market. Having been forced out of permanent jobs they realise they can earn far more and probably achieve the same level of commitments as FTE’s. This had resulted in a massive increase in the actual cost of public sector procurement resources and I am sure the same is true for most professions.

  6. Matt St. Onge
    Posted February 12, 2009 at 3:41 pm | Permalink

    I’d truly love to see a formal ROI analysis done on this…at several large companies… Companies often forget to account for those soft-costs such as replacing human capital (and the downstream impact to the productivity of the organization).

  7. Posted February 12, 2009 at 3:42 pm | Permalink

    At technology driven companies, it seems like the companies that innovate through a downturn come out on top later on. This happens again and again through our economic cycles. Many of the victors of a positive economic period are the start-ups that are populated by the laid off employees of previous industry giants.

  8. Posted February 12, 2009 at 3:44 pm | Permalink

    Phil: So you lose your job, a hail storm hits and damages your roof, you get a $1200 check from the insurance company, and the roofer estimates $6,000 to replace the roof. If you don’t replace the roof in the next few months, you are likely to suffer additional damage that will double the repair cost a year from now. On top of that, one kid need braces, and if you don’t do it now, her teeth will be that much more expensive to fix as they become more and more crooked. As if this isn’t enough, you know that your car needs a wheel alignment because one tire is wearing funny, and a year from now that tire will be bald if you don’t get the job done now.

    If you borrow out of your savings to replace the roof, fix some things on your car, get your kids the braces that they need sooner than later, and otherwise continue to spend as if your economic situation had never changed, you will likely have to declare bankruptcy six months from now and will lose the house, the car, and your marriage. You will be looking for a job while living alone out of a cardboard box under a bridge.

    Be careful about assuming that everyone shares a common perspective on short and long term goals, resources, costs, needs, and optimisms.

    Robert Owen

  9. Alexander Kopriwa
    Posted February 12, 2009 at 3:45 pm | Permalink

    Well the ROI of “killing talent” is a non-issue for senior management since the company will continue to function (for some time) while they try to balance P/L and Balance Sheets.

    Looking good to shareholders, and attractive to potential investors, is all that counts. Now when the fat cats in Wall Street have burned themselves we may FINALLY get value of human capital back into the equation.

    Too much management have not understood the need to carefully architect value add business processes with a distributed value chain in an increasingly globalist world.

    The West (and some of East) are victims of their own Fantasy Forecasting projections.

    This is an interesting subject indeed! Capitalism has shot it self in the foot!

    Alexander Kopriwa

  10. Posted February 13, 2009 at 9:51 am | Permalink

    Phil, as usual great post, important topic, solid justification. Thanks! Interestingly enough I also touched on the topic in my recent “The Darkest Side of Outsourcing”, one of the thoughts in that post was about impact of firing – replacing local workforce with offshore resources is double hit on remaining workforce with inevitable impact on employee morale and overall workforce quality:

    * Employee motivation will disrupted with result in increase in political behaviors, anger, fear – which is likely to negatively impact quality of customer service, performance decline, and decline in quality of work atmosphere.

    * “Survivors” experience more stress due to longer work hours with re-designed jobs, and increased uncertainty regarding future downsizings.

    * Senior and the most marketable employees may leave with result in decline of overall quality and qualification of workforce and loss of institutional memory.

    inks:
    http://pragmaticoutsourcing.com/2009/02/10/the-darkest-side-of-outsourcing/

  11. Posted February 13, 2009 at 9:53 am | Permalink

    Phil,

    I agree with your premise but I think it goes beyond IT professionals into other supposedly non-core disciplines. I believe that the legacy of the outsourcing mega-deal where a single supplier would take responsibility for a host of often non-related business processes (connected by technology) coupled with increasing cost pressure and economic downturn has resulted in many organisations leaching out critical business knowledge and core skills – an over reliance on the vendor for account management skills across a streamlined supplier base – great for the likes of you and me as the need for specialist external advisory and general sourcing skills increased enormously.

    The tide appears to be shifting and those same companies are taking an opportunistic approach to renewing/renegotiating those deals into shorter best-of-breed multi-source arrangements which will inevitably place a bigger strain on their already overstretched internal resources at a time when they can least afford it. In an effort to control costs and acquire skills they will turn to the contractor market (rather than professional consultancies) where the day rate is significantly lower but still way higher than the legacy resource and skills pools they used to own – so it appears to them to be a good deal – but one without structure or clear ownership.

    Just to echo your specific IT business skills point I had a client a few years ago who over a number of years had effectively outsourced its entire IT capability even at strategy level – I was there to help them re-tender their infrastructure contract – They had one primary and some secondary application development and maintenance partners, and a second primary partner that looked after their desktop, service desk and all other infrastructure. Their retained IT organisation consisted of an IT Director and two business project managers … it worked but only just … one of the recommendations we made aside from the procurement transaction I was managing was to increase the retained team and build up vendor management and strategy skills and take control back. This is an extreme example and there are others at the opposite end of the scale where clients end up duplicating effort because they can’t let go, have ambiguity in responsibilities and end up paying more for a whole lot of scrambled process without clear accountability.

    Now is not the time to be making knee jerk reactions that are going to come back and bite hard … suppliers are feeling pain as much as anyone else … now is the time to test the marriage vows and yes, tighten the belt if that is needed, but think long and hard about the long-term consequences of current actions.

    John Sheridan

  12. John Sarich
    Posted February 13, 2009 at 9:54 am | Permalink

    In many respects, the issue of IT talent varies if you are a software development company, engaged in the development of software for resale/upgrade to your core software business, you will a view that might be different from the bank or insurance company that is basically tasked with running a “system”. In both cases, you have intellectual capital that must be clearly understood. And, like other forms of capital not all are equal.

    And, compounding this issue, is the simple business fact of the CEO/CFO that are trying to keep costs in line with revenue. Today’s market has a lot of IT talent that is “available” or on the bench that can be utilized to meet on-going demands for projects, maintenance and so on. And, there are some skills in IT that are in short supply and those people shold not be part of a variable cost solution.

    I will give you a real-world example: In 2002, following 9/11 the technology industry was in the dumper, companies were laying off people, moving IT off-shore, and otherwise doing what they needed to do to keep costs in line with revenues. I happened to be working for a software company that had about 1,000 employees, was publicly traded, and was not seeing sales come readily enough. I recall a Wall Street conference call where the CEO commented that earnings for the next couple of quarters would not meet Wall Street expecations. Well, the outcry from the investor class was immediate and loud. But, no layoffs.

    From that incident our CEO decided that once the economy was back in the swing, he would accumulate cash, to the extent that we could go a year with no new sales and still keep everyone employed. You see, he understood that you don’t fire employees that had 10 years invested in designing and developing a system, just to put them on the street to satisfy a short-term financial need. He understood human and intellectual capital to extent that we all knew that you just couldn’t go out and hire that skill set off of the street. Nor, could you send it off-shore.

    That is the key issue that faces many CIOs and CFOs right now. Yes, there might be some IT slots that are expendible, but you had better be careful, because the IT pro you let go, could be the key resource six months from now when a new product launch is getting ready, and you have no one that knows how to do it.

    John Sarich

  13. Posted February 13, 2009 at 4:06 pm | Permalink

    Welcome to the new world order of things. Let us just accept it and get used to the fact that long-term employment is passé. We have to re-invent ourselves every 12 to 18 months to stay ahead of the game or we become redundant. As we all know that currently technology is making leap and in all areas. I believe that technology will be leveraged to fill in the gap when business pick up. As economy gains momentum organizations will be cautious and adopt current or newer technologies and platforms to conduct business efficiently.

    The cost of training and retaining employees is high. Empowering employees and training them with correct knowledge for the organization to maintain the leading edge in the market is huge. It is often smarter for an organization to bring someone from the outside to fill the gaps.

    The world is moving towards virtualization and fluidity. I foresee dynamic task-oriented environments than today steady employment in the future.

    At the end it is like a card game (responsibilities), we are holding our cards (responsibilities) and wondering why the CEO is playing his cards (responsibilities) like that? We see our set of responsibilities and react, however the CEO has his set of responsibilities and YES they all make mistakes.

    The other way to look at this is that the leaders have very few options that make such a huge impact on the bottom line when time comes for thier annual report card.

    Regards,
    Suresh Kumar
    Telecomtech.wordpress.com

  14. Leon Kotovich
    Posted February 13, 2009 at 4:08 pm | Permalink

    Phil,

    Great points that I feel need to be asked in a slightly different manner. Why does human capital strategy seem to be poorly aligned in good times as well as bad times?

    When a company is forced to drastically reduce fixed costs (employees are by far the largest fixed costs), what does it _really_ mean?

    The answer is very simple: at the fundamental level, the strategic planning process has failed. It’s very difficult (yet not impossible) to have a a broader and longer outlook than just the next quarter and quarterly financial performance.

    What makes this even more alarming, that most companies are reasonably good (yet not necessarily great) at hiring the right people at the right time. But – most companies are not very good at shrinking in a manner that still allows them to be competitive and ready to grow once economic conditions improve.

    That’s why there are many management consulting companies – frankly for the right reasons – in business to sell strategy and organizational alignment services.

    It starts and ends with the right leadership, able to recognize important trends and adjust well in advance before drastic measures are needed. Surgery is always more expensive than physical therapy.

    Leon Kotovich

  15. Posted February 21, 2009 at 12:39 pm | Permalink

    This is a huge topic of debate, now I would like to take a view of this apart from hire and fire. This is about talent lifecycle management and attracting the best ( yes costs $), developing them, growing them and then retaining them.

    This lifecycle process has to closely align with the business lifecycle process and anything that is out of resonance will need to be churned out and fresh blood infused into the cycle in the form of different lengths or depth of relevant experience by retooling the existing talent ( not throwing them off, if possible) and also making startegis hires and fits.

    This is not for outsourcing, but holds true for all organization all industries. Anyone who takes a hire-fire policy as opposed to talent lifecycle management will pay for these deeds in blood in the long run.

  16. Cristian Mindricelu
    Posted February 21, 2009 at 12:40 pm | Permalink

    As you already touched some key points in the question itself, I would add just a few more on the costs associated with firing key IT staff (I mean – people having that inherent understanding of business processes that you also referred to):

    1. First, it depends on the industry and level of standardization of its business practices. High variance of “how things are done” would lead to low degree of process uniformity and relative non-equivalence of supporting software packages. This is also linked to how important is business agility to that industry (what is the norm for time to market a new product) and would lead to how tight is IT being linked to one company’s business model.

    2. Then, it’s complexity of information systems architecture. Companies that did not do their house-cleaning before the crisis would be worst affected. And maybe it would not be the result of their self-complacency – complexity could be the effect of M&A integration process. They will definitely need to keep key IT staff if they want to ever see growth back with the economy in future.

    3. Past build vs. buy decisions will strongly influence such IT talent replacement costs. But building software is supposed to have brought significant competitive advantages in the past, so associated benefits should have already been accounted to cover these losses.

    4. Don’t forget the costs on the other side: key IT people in your company might take long time to become again key IT people in other companies they’ll join after you fire them. They might need to accept lower comp&ben just to avoid being jobless for long. So temporary salary cuts could become a mutually acceptable alternative (but mind the flip side – they might demand higher increases later if profits return).

    In the end, IT should be the knowledge industry/profession. Replacing lost operational knowledge (even if available on paper) would definitely require time. There is a time limit under which you cannot go, no matter how much money you’d like to invest later to recover what you lost (hiring technical experts, business consultants, buying all-powerful software packages, etc). This duration would be dependent on complexity that a (smart) newcomer would face while trying to understand your IS during later economy upturns. If time would then be of essence for your company, associated losses would be much higher than could anyome predict. And one should also consider the fact that getting good experts (employed or contracted) would be far more difficult in periods of economic growth than in times like today.

    In case of non-key IT staff, future costs associated with present lay-offs might be acceptable. But then it is up to fine management observation skill to detect key from non-key…

  17. Posted February 21, 2009 at 12:42 pm | Permalink

    Phil – Your point is well made. While layoffs and reductions have the benefit of reducing costs, it takes a while to realize those costs. There are a lot of costs associated with laying off employees. The actual benefit to the organization will not be realized for months. In addition, you have lost something much more valuable in terms of investment in that individual and possible company/trade secrets that can never be fully mitigated.

    If companies don’t egage in smart workforce planning that is centered around long term business objectives, then we are all in trouble. The recovery from this current economic state will be long and painful. That being said, many choose this opportunity to cut employees that should have been cut a long time ago, and improve processes and systems that should have been improved years ago. It is an opportunity and a challenge to make smart human capital decisions in this economy.

    In the blog listed below, there is a short article about smart workforce planning and the need to keep a long-term focus:

    http://blogs.payscale.com/compensation/2009/02/strategic-hr-planning.html

  18. Richard Peynot
    Posted March 1, 2009 at 1:37 pm | Permalink

    Here in Europe, several manufacturing companies, especially in the automotive industry (including suppliers) have launched “volonteer for departure plans”, including in thjeir IT department. Unexpectedly, they faced more candidates than expected, beyond the targeted quota. As a result, a lot of key IT experts left: network architects, network managers, security architects, security experts, SAP developpers, project managers. Superbe. Not only companies miss these people, but they need to hire external consultants to do the job, and they will need to rebuild complete teams. I don’t understand how a company can let its key workers evaporate and dangerously mortage the future.

  19. Posted March 2, 2009 at 5:06 am | Permalink

    Great article! I’ve been working in this area for a number of years – looking at the economic costs of redeployment whenever a change in workforce is required, either due to sourcing or economic need. I’m helped by being in Europe, where employment regulations make severance an expensive and lengthy process. However, this focuses the mind somewhat on making sure that the individuals involved in the RIF exercise are redeployed appropriately – not just severed. Certainly, its easy to justify the cost of a project manager to review the in scope population and find alternative opportunities, however a full business case analysis is challenging due to the difficulty of assigning a value to talent.

    Change management is a key discipline that should accompany every RIF decision – a good outcome for each individual, as much as can be achieved, generally translates into increased employee engagement and even more liklihood of returners in the event of an upturn creating suitable vacanices.

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