What are you losing during a retrenchment?

There is a myriad of emotions that is part of any retrenchment in the lives of all parties involved. The remuneration packages offered is in almost all instances do not reflect the actual value and worth of the retrenched employee and also does not reflect the loss to the company. In these cases the human capital losses to the company will not be reflected in a balance sheet. This unfortunate reality is causing great distress to the company and the long term loss of value to the company is not immediately realized. It has been calculated that there is an actual 75% loss in company value during any retrenchments. This has been calculated and researched by scholarly experts in the field.

Intangible assets- those not measured by a company’s financial system- account for more than 75% of a company’s value. The average company’s tangible assets- the net book value of assets less liabilities – represents less than 25% of market value.

What’s true for companies is even truer for countries. Some countries, such as Venezuela and Saudi Arabia, have high physical resource endowments but have made poor investments in their people and systems. As a consequence, they produce far less output per person, and experience much slower growth rates, than countries such as Singapore and Taiwan that have few natural resources but invest heavily in human and information capital and effective internal systems. At both the macroeconomic and microeconomic levels, intangible assets drive long-term value creation. – Strategy Maps by Robert G. Kaplan & David P. Norton published by Harvard Business School Press

When AT&T announced the retrenchment of 7000 workers on 7 October 2004 it pushed the stock price up by 3%. The perceived increase in short term profits caused many to buy more stocks without taking cognizance of the long term (75%) loss in company value. When a company loses 7000 workers then its value is declining even amidst short term stock price hikes. Similar examples can be found in the local context but the principle remains the same. I do not advocate the redundancy of an emergency, last resort approach of retrenchment but want us to rethink the potential loss to the company and how to maximise on the actual value residing in our staff. A new approach is needed even in this current uncertain and fickle economic climate. Even though we cannot overlook the importance of retrenchments or other methods to curb companies’ financial losses, we have to look for and implement a hybrid approach that will maximise the staff value in the company.

I want to propose a possible alternative approach to this current possibility that faces all companies who employ staff of any amount. An important part of managing staff should include the periodical auditing of staff value. This is an important recourse for companies who are not yet faced with the decision to retrench. This is the first step in the right direction. It is important that we know what we have.

The process of auditing of staff do not have to cut into the profitability of the company as a concise but concrete survey  will provide the company with the necessary data to make informed decisions. You do not even have to take the time to start formulating such a survey as our company already did the hard-work and a copy of it is available upon request. (For a copy email us at: mailto:brainwaveprojects@live.com?subject=Request%20Survey or brainwaveprojects@live.com)

The second part comes into effect when the company has no recourse but to retrench then cognizance should be taken of the staff value and look at how to capitalise on the staff value. In most cases pay-outs ranging into hundreds of thousands of rand occur which the company has more or less no say however how it will be spend. What if the company take the time to provide those who will retrench with the training, expertise and back-up to venture out into their own? This can be achieved if the company already have on file the staff value audits – this will give the company the data needed such as the staff member’s strengths, weaknesses, etc. A business plan around the person’s strength can be developed. Some of the money paid out can be used for the start-up and the company providing guarantees in the form of soft-financing. Not only will the company contribute to the enterprise development agenda of the South African government but will also create jobs by empowering entrepreneurs.

The possibilities of this hybrid approach are numerous. I know that the content in this letter make it sound too simple and I agree there exist other factors that need to be considered but the underlying fact is that it is possible.

Copyright - Mario Botha 3 April 2009