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Persistent inflation, ballooning prices and other key macroeconomic factors are leading businesses to brace for the impact as experts predict the US economy will enter at least a mild recession as early as 2023.
Companies are also examining workforce cuts as a way to potentially cut costs or restructure businesses ahead of a more lean economic period — recent reports have found that banks like USAA downsized their banking divisions, for example, while many big-name technology players like Amazon, Peloton and social media platform Meta have cut staff or instituted hiring freezes.
Protecting their cash flow and minimizing cash burn is important for companies facing such financial pressures, but workforce cuts are often “penny wise and pound foolish” for firms looking to achieve savings, says Matt. ArmaniCEO and partner of an accounting and consulting firm Armanino LLP said in an interview.
More companies are looking at workforce cuts ahead of the coming recession — 80% of hybrid-working and all-person companies said they intend to lay off employees during the gradual economic downturn, according to a study released Thursday by freelance platform Fiverr.
However, increasingly high costs to hire, train and retain new workers “make workforce reductions a very expensive way to find and find savings,” Armanino said.
“Our advice to businesses is to apply a lot of foresight before cutting the workforce,” he said, pointing out that cutting employees only to hire them later after a potential recession — which may not last too deep or too long — could happen. Tipping costs for companies as they labor to rework and rebuild.
Meeting unofficial definitions of a recession, the country’s economy shrank for two consecutive quarters, contracting 0.9% in the second quarter after a 1.9% decline in the first three months of the year.
Experts, though predicting a slide over such a period, remain divided on how long the recession will last, ranging from all of next year to a few months.
Along with rising prices and lingering supply chain issues, businesses are currently facing battles for top talent in a tight labor market, which puts an additional premium on employee retention.
Payrolls climbed to 528,000 in July while the unemployment rate fell to 3.5% to pre-pandemic levels, allaying some fears of a recession but likely failing to persuade institutions like the Federal Reserve to scale back planned rate hikes to meet their 2% inflation target.
That’s why retaining top talent is an increasingly top priority for businesses today, with a recent PwC report finding that 38% of business executives identified talent acquisition as a top risk — coming in slightly behind cybersecurity, with 40% of leaders agreeing to this number. 1 risk faced by their organizations.
Nearly two-thirds of executives have either changed or plan to change processes to address labor shortages, the study also found.
Taking steps to invest in technologies like AI that can take over time-consuming or repetitive processes rather than reducing their workforce can help businesses weather the economic downturn more successfully.
Investments in processes like digital transformation “often have an immediate impact on labor costs and savings,” Armanino said. Using technologies like AI can help save costs as well as provide a short-term return on investment for businesses, he said.
“Businesses that are discontinuing these initiatives because the economy is slowing are missing an opportunity, [from] Our approach,” he said.
A balance between skilled workers and investing in key technologies or equipment can help firms reduce costs while protecting their cash flow.
“I think the key is, where can human capital be applied to things that are obviously in human nature that require judgment, skill and emotion?” Armanino said. “And where is it that there are repetitive processes that can be standardized and potentially automated? That’s really the question that businesses are looking at.”