The recovery

We've all been waiting for positive news about the economy, and at long last it's here. After a four-year recession, the economy appears to be on the rebound and is showing signs of sustainable momentum. Economic indicators support this recovery: the Dow has grown nearly 50% in one year; the GDP grew 8.2% in the 3rd quarter of 2003, the strongest growth since 8.4% in the 4th quarter of 1983; the unemployment rate was down to 5.7% in January from a high of 6.4 % in June, 2003. Finally, the tides have turned.

The perfect storm

Though the current forecast calls for a steady recovery, clouds are already gathering on the horizon. The conditions are ripe for The Perfect Storm - a storm of extreme intensity that occurs only when all the right conditions come together. As told in the book and subsequent movie of the same title that documented the Perfect Storm of October, 1991, there were few survivors.

Like that fateful storm, the current converging economic forces are creating an environment just right for potential business disaster - unexpected employee attrition and turnover at a level many businesses have never experienced. Companies already weakened by downsizing and cost cutting must be prepared to heed the signs and take action if they are to survive, much less excel. Too strong a statement? Let's look at the indicators from several recent studies:

• 83 percent of employees are likely to seek new employment once the economy improves.
• 48 percent of managers are likely to seek new employment once the economy improves.
• 75 percent of those managers are actively looking now.
• 56 percent of HR professionals indicated it is likely that voluntary turnover would rise due to the improving economy.
• The Massachusetts "brain drain" will continue as residents leave to take jobs in other states.
• The threat of competition from other states for major Massachusetts talent is very real and growing. For example, the North Carolina Biosciences Organization (NCBO) ran a full-page ad in the Boston Globe on December 1, 2003, inviting Bio-Pharma sector workers to move to the Technology Triangle. Among the incentives cited were lower taxes, a better standard of living, greater opportunity and lower cost of housing.

Although many of these factors are beyond a company's direct control, that doesn't let them off the hook. When tenured talent walks, the chances of finding a suitable replacement are slim.

The impact

The level of turnover may exceed a company's capability to handle it and can force a strategic crisis - schedule slips, quality degradation, business process breakdown, delivery delays, and the resulting potential of customer attrition.

Tangible recovery costs include recruiting, rehiring, and retraining, and sometimes reacquiring customers. In fact, a new employee typically is a cost to the company until he or she reaches a threshold of productivity. In higher level technical and management positions this can exceed 6 months. For companies that have cut all expenses not deemed mission critical, such as training and recruitment efforts, the lag in performance, additional cost, and stress on remaining employees creates a vicious downward spiral.

Equally critical to an organization's viability are its Vital Intangibles (VIs), which can take the form of informal relationships, networking connections, or a web of favors a key employee has spun during his or her tenure - favors from vendors or other business contacts that can be called in as needed. VIs are hard to identify and may be even harder to recoup. They are embodied within the organization's investments, the kind that live, breathe, and walk - potentially right out your door. Also at risk are critical customer relationships, carefully fostered over the course of several years. Many companies will take the steps to protect trade secrets, intellectual property, copyrights and patents, but intangible assets are less obvious, though no less critical to an organization, and their loss is no less damaging.

Undocumented workarounds, tricks, tips and "the knack" that come from experience in multiple roles within the organization make up another collection of VIs. These are the subtleties that allow an employee to do a task more efficiently, thereby increasing their performance - and the company's. These crucial pockets of knowledge are rarely formalized or disseminated throughout an organization. Rarer still are they captured or documented. If any of this wisdom is imparted to others, often it's through informal means, much like a tribal oral tradition passed from one generation to the next. Most companies have done nothing to ensure the safeguarding or documenting of these assets. How much is this knowledge worth to your business? Consider the 'piranha syndrome' and the cumulative bites that could come out of your bottom line without it.

The causes

So why would better economic conditions instigate an employee mass exodus? Consider the signs that have been apparent for some time:

• Survival mode - In response to the recession, companies hunkered down, tightened their belts, focused on cutting costs and cutting corners - sometimes even customers. As a result, many organizations as a whole have lost sight of or destroyed their raison d'etre - their reason for being. Under such conditions there is a natural tendency for organizations to turn inward, turning all attention toward survival. Little emphasis is placed on preparing for expansion opportunities as the economy recovers. With a decimated strategy and no visible commitment or active engagement toward building the future, a company's high-potential employees have little incentive to stay when a competitor offers a more compelling future.
• Career recession - With the flattening and downsizing of organizations, opportunities for career growth have been severely limited - both vertically and laterally. The movers and shakers haven't moved in 3-5 years and are long overdue. When advancement opportunities appear elsewhere, they will be looking. In addition, many people are taking a new look at their careers as employees, i.e., corporate serfdom. Some are contemplating business ventures of their own. In fact, some employees are not looking to work for you or your competitors; they are planning to become your competitor.
• No investment in managers - When people look for greener pastures, they're not necessarily looking for a new company. As documented in the groundbreaking study by the Gallup Organization, the number one reason people look for another position is to leave their manager, not because they don't like their job or the company. Reduced investment in management development ultimately leads to employee dissatisfaction with their manager, their primary reason for leaving.
• Disenfranchised employees - Many employees feel they have been taken advantage of: overworked, stifled, and burned out by excessive hours and stress, only to be rewarded with reduced benefits and/or pay. Lifetime employment no longer exists, and company loyalty is becoming a thing of the past. As survivors of layoffs, the lean and mean have become the starved and angry, not to mention disgusted. Just look around. Listen to the hallway conversations. Feel the tension and frustration. Your top talent will have the first opportunity to jump ship and, as these influencers shape public opinion within the organization, others will soon take the leap.

In Part 2 of this article, we will look at solutions for businesses to not only survive The Perfect Storm but to excel in what are certain to be turbulent economic conditions.

(Ed. Note: this article originally appeared in slightly different form on 7thwavesolutions.com.)

Scott Schulz is the Director of Business Development with 7th Wave Solutions, a management consulting, organizational development, and training firm. Scott is a NEHRA member and can be reached at scott.schulz@7thwavesolutions.com.