For Bigger Returns, Cost-Cutting Is Out; Investing in People Is In

By Kelly Palmer, Chief Learning and Talent Officer, Degreed

At this time of a tight labor market and “great resignation,” one of the most important lessons for businesses seems to be getting lost -- and all stakeholders, including employees and investors, are paying a big price for that. Leaders need to learn this right away, or their organizations will suffer well into the future.

The lesson: In this era, profitability comes far more from investing in people than it does from cutting costs. The numbers prove it.

For one powerful example, look at what happened early in the pandemic. From March to April 2020, unemployment skyrocketed by a massive 10 percentage points, from 4.4% to 14.7%, according to the Bureau of Labor Statistics. A year later, those levels were still higher than during the Great Recession. It was only in 2021 that they came down to pre-pandemic levels.

But now, employers are having trouble attracting talent. With a tight labor market and workers empowered to make choices like never before, businesses can’t hire fast enough. And they’re losing money.

How understaffing hurts

In a survey late last year, half of workers said their businesses are understaffed. It’s possible that organizations are even more understaffed now, as people continue to quit their jobs at record levels.

How much does this cost businesses? To take just one example, “The labor shortage cost FedEx nearly half a billion dollars, primarily in lost productivity due to understaffing,” Brookings reports. The retail sector is often especially hard hit. A 2018 study found that businesses lose $38 billion a year from long checkout lines alone.

There's more. When companies are short staffed, they burden their existing employees with more work -- triggering a new wave of burnout. This in turn, damages productivity and creativity, reducing share values further.

Another path

Obviously, certain industries such as hospitality had to reduce staff when the pandemic began. But many industries were far too quick to jump to such cost-cutting, despite warnings. As Brent Orrell of the American Enterprise Institute wrote in 2020, “In the past, companies have frequently had reason to regret such moves…. In an ironic twist, trying to save a company by cutting staff has actually been shown to damage firms’ competitive standing as economic activity increases.”

There's a much better way: investing in people. Stockholders know to hold onto certain stocks during downturns and, often, to invest more during those times. When there's a rebound, they rake in the profits. Organizations should recognize that the money they put into their staff is an even more powerful long-term investment.

This kind of investing shows up in numerous ways. Pay and benefits are obvious places to start. Increasingly, businesses are also seeing the importance of investing in employee well being.

Often, the most important place to invest is in skill development. As I explained in The Expertise Economy, skills are the new currency of work. Skill gaps are holding companies back, making them less productive, competitive and innovative. Gartner reports that 40% of HR leaders “say they can’t build skill development solutions fast enough to meet evolving needs.” And Adecco finds that only 37% of non-managers “believe their company is effectively investing in their skills development.”

When business goes through a downturn, that can be an opportunity -- a chance to give workers more time to develop the skills they need to close gaps and form the future workforce. Think of it as planting seeds that will grow.

Investing in people is crucial for long-term profitability. So companies that do a good job of it are especially good investments for stockholders.

To find out whether a company is investing adequately in its employees, check out what current and former employees say on websites like Glassdoor. Ask leaders what anonymous surveys they’re conducting to gauge employee satisfaction with what the business is offering them. In earnings calls, ask companies what steps they’re taking to increase their investments in their people.

Building the future of work requires fundamental changes in how organizations approach just about everything. When they make investing in their people a top priority, they set themselves -- and their shareholders -- up for lasting success

Kelly Palmer is Chief Learning and Talent Officer at Degreed, an adviser and keynote speaker on the future of work, and co-author of The Expertise Economy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.