Economic Realities in the Workplace

This blog has expended a lot of words on the importance of bringing knowledge and awareness of the outside world into organizations. The struggling economy we’ve been experiencing for the past 27 months (or more) has put a variety of strains on business, adding a new imperative in this regard.

Companies struggle to maintain profitability (or even stay in business) amid feeble market conditions, never mind trying to grow the business. Meanwhile, it's difficult for their employees to be at their best when they worry about the potential loss of their jobs (or those of co-workers) in the context of a 10 percent unemployment rate.

This particular period in our history has been made all the more difficult for businesses by the additional burdens and uncertainties spawned largely in the political arena around issues like:

• The possibility of increased business and personal taxes at federal, state and local levels;
• A growing thicket of federal and state regulations and red tape;
• The rising cost of health care insurance; and
• Looming energy policy changes (various efforts to “regulate carbon emissions” and/or reduce the use of fossil fuels).

Individually and collectively, these add to the cost, complexity and challenge of doing business, both today and in the future, putting further constraints on businesses’ ability to focus on what they do best and to expand by hiring and retaining qualified people, buying new equipment, and building new facilities.

As Congress, state legislatures and other political leaders debate whether to increase taxes or to impose new taxes and regulations, business leaders and owners hesitate, paralyzed by the uncertainties of additional costs that could arise in the coming months and years. They know it's dangerous to spend money they may not have a year from now. That translates into postponement of hiring new people – since additional employees represent long-term investments – or incurring debt to build plants that may not run at capacity in a weak economy.

Instead, businesses hoard cash against the possibility that they will have to spend it later on things like elevated taxes, higher energy costs and/or increased health care premiums.

Unfortunately, employees are too often divorced from these external economic realities. Within many companies, certain myths tend to persist: that the company is immune to natural economic forces; that it has infinitely deep pockets with which to pay ever-rising wages and benefits; that company management is over-stating the impact of external forces on the business; and that they can always raise prices to maintain profitability.

Though tempting, the answer does not lie in passing along increased costs in the form of higher prices. While some price increases might be possible, this route is never the only solution. Besides, customers can find less expensive sources, postpone their purchases, or to do without altogether.

Employees need to have a solid understanding of things like revenues, cash flow, and profits. They must appreciate that increased expenses – whether in the form of taxes, energy costs or health care premiums – impede the company’s ability to earn a profit, and that profits assure that an organization can continue to operate well into the future.

Put another way, a business’ future is contingent on whether it can update plants and equipment, maintain those plants and that equipment, recruit new talent, and improve and update its employees’ talents and skills – all of which are impossible in the absence of profits. A stagnant organization – one unable (or unwilling) to reinvest in itself and its people – is an organization in its early death throes.

Those harsh economic realities and the uncertainties of our times must be part of the ongoing internal dialogue. This imperative to bring outside realities inside bears repeating now as 2010 comes to a close and we look forward to (and hope for) an improving economy in the New Year.

All employees need to understand that the environment in which their employer operates has a direct impact on its ability to continue to employ them, pay them what they deserve, allow them to pursue self-improvement and personal career goals within the organization, and to make the capital investments that will help maintain productive, cost-effective operations.

To do otherwise, to keep employees in the dark to guess and make assumptions, is dangerous on many levels. But at base, it isn’t fair or honest. Have a conversation with your employees about these simple facts:

• Higher corporate taxes and increased energy costs mean less money to invest in our people and plants.
• These same increased costs also affect our suppliers, which means the price of the goods and services we buy from them will likely go up, too.
• Higher taxes and energy costs also impede our customers’ ability or willingness to buy our products.
• More regulations mean a further shifting of resources away from productive investments in our people, plants and equipment.
• Higher health care costs will necessitate some reduction of benefits and/or increased co-pays.
• There is no deep, infinite well of money for salary and benefit increases, or for structural investments and capital improvements. It all comes from a business’ ability to turn a profit on revenues after expenses. And if expenses like taxes, health care and energy go up, profits decline.

It’s your responsibility as a business leader and manager of people to make sure employees appreciate the direct links between public policy decisions by our elected representatives and a business’ ability to prosper, as well as the people that that business employs.