Man versus Machine: Human Capital and Business Reconstruction

In 2008 the collapse of Lehman Brothers turned the credit crunch into a global rout, and it wasn’t a great time to be a tour operator selling fairly costly adventure holidays to the squeezed middle.  At the time I was working with a UK operator that saw its bookings drop off a cliff.  In the end volumes were to contract by a third, but at the time the run rate was much worse and, like many other businesses, we had no idea if there was any limit to how bad things could get.

Radical action was required, and it wasn’t just about shaving 10%.  Most businesses could have done that without making major changes and without losing much ‘tacit knowledge’.  In the end, we were to lose 40% of our people in a single twelve month period.

This was immensely painful, and not just for reasons of compassion.  In a specialised service business such as this, ‘human capital’ is a genuinely key strategic resource.  Shedding staff means losing organisational knowledge.  It would be like an electricity generation company giving away its power stations.  So there is a temptation to try and come up with ways to hang onto staff.

In the end, we decided to resist this temptation – we redesigned the business model to be as effective as it could be in facing the new reality.  This was hard work.  We couldn’t just ‘trim fat’ from the existing structure, we had to create an entirely new structure.  A new machine.  And to lose some very good people.

It turned out that this was the right thing to do.  The people who stayed bought into the strategy and were very committed.  A number of legacy problems that we probably wouldn’t have otherwise faced were eliminated, including bringing the top management team much closer to the coal face.  It wasn’t just that costs were reduced – the business that emerged was functionally better as well.  And a respectable level of profitability was restored, with volumes in the end settling out nearly 40% higher than what had become our new breakeven point.

Still, we couldn’t help wondering whether we could have done more to retain more of that ‘human capital’, and what the long term cost of losing it would be.

Earlier this week  I listened to James Rose, a director of global property consultancy WSP (and fellow Bradford School of Management alumnus) describing a near identical set of circumstances that they had to face.  In their case, they had valiantly tried to keep as many of their people as possible, and had reduced salaries across the board as an alternative to enforcing higher levels of redundancy.  When redundancies had to be countenanced, as few as possible were made, so that several rounds had to be endured.  Death by a thousand cuts.

It turned out to be a mistake, destroying morale and fundamentally damaging the culture of the business.  It also seems to me that this would inevitably have constrained them from designing a business model optimised for the environment.

They did much else that was right, and can now describe themselves as ‘thriving, not surviving’, but it is at least somewhat reassuring to think that, on this point, we were probably right to take the pain when we did.

Leave a comment

Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.

2 thoughts on “Man versus Machine: Human Capital and Business Reconstruction”