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Organizations are once again rethinking their talent agenda in the light of tougher economic conditions. What does history tell us for how they should approach this?

For thoughts on this, we reached out to Ranjay Gulati, a professor at Harvard Business School who co-wrote a 2010 Harvard Business Review article titled “Roaring Out of Recession” examining the practices of the 9% of companies that flourished during previous downturns. Here’s an excerpt from our conversation, edited for space and clarity:

With the economic downturn, what are the best practices for people who are thinking about the talent agenda?

Let’s think about what the knee-jerk response of most companies is in an economic downturn, which is to cut costs. The survival instinct kicks in, what you might call the defensive posture. So the entire focus shifts to ‘We are in the business of survival.’ And a survivalist mindset involves cost cutting. So the obsession becomes with cost cutting, which is fine, I’m not disagreeing with that.

But you have to remember that the best time to get ahead of competition is down markets, not up markets. If you look at market churn data—churn is change in relative market position—you see maximum churn in down markets, not up markets. It’s really hard to leapfrog somebody when the markets are booming.

How do you create a growth mindset? How do we create an environment saying, ‘Yes, we’re going to have to manage costs, but—because people want to be on a winning team—how do you change the mood?’ ‘Morale’ is too restrictive a term. It is managing the mood in the organization and the mood you want in the organization is that we see this as opportunity.

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What are effective levers for managing the mood?

One way of managing the mood is about outlining a growth agenda. People say, ‘Let’s think about our agenda for the next 12 months. Where are we going to cut costs?’ And I’m not saying don’t do that. Yes, here’s our cost-cutting agenda, and by the way, here’s our growth agenda. Here’s how we’re going to lean into the downturn to really leapfrog competition, take advantage of opportunities, organic and inorganic, that we are creating. That means sometimes even excess cutting. We’re creating the space, the resources, the slack to grow while others are in conservation, defensive postures. We want to find also a way to grow. So it’s really outlining an agenda for growth.

Your research found that there are a few areas that were opportunities for investment during a downturn, including research and development and marketing…

That was what we found across those three recessions that we looked at, though I wouldn’t want to over-generalize from that to today. I would say it’s really about a scalpel rather than a sledge hammer. You’ve got to identify pockets where you really want to invest and double down. And it’s also going to be industry specific. It’s going to be company specific. Where do we see avenues for growth? Which sectors, which geographies?

I’ve seen companies saying, ‘We need to rethink our geographic footprint.’ Others are saying ‘We need to rethink our customer footprint.’ So what you’re trying to do is be very deliberate. In strategy, we say the two fundamental questions are what game are you playing and how are you going to win? So think about what game you are in and how you are going to win that game.

What I would borrow from professional sports is a winning mindset, playing to win rather than playing not to lose. A defensive posture is what really whacks companies in these markets.

What are the implications for talent investments in an economic downturn?

Some organizations—not a lot—have understood this idea that part of our pay package includes money and status benefits, but it also includes a nice environment, includes a challenging place to work where you’re going to grow, learn, and have responsibility. And we’re hopefully going to help you connect and make it personal and feel good about what you’re doing. In a downturn, that’s presumably more important than ever.

When people start giving short shift to all that, when you go into this financial-oriented mindset, you start to neglect those kind of things because it does involve some minimal deployment of resources, investing in culture, investing in talent investing—all that goes out the window. All training programs go out the window, all employee wellness programs go out the window, all this other stuff. This is seen as frivolous stuff. And that’s a big mistake.

Then what we’ll do is to retain talent, we spend money, we’ll pay them more. And then you’re going to get what kind of talent? There’s a vicious cycle built into this model. I cut costs in the wrong places when I’m not investing for my talent, for helping them feel connected with the organization. The less connected they feel, the more they’re leaving. Then I’ve got to buy my talent, effectively swapping out the right talent for the wrong talent.

Are there any takeaways for leading through inflationary times, including for how to navigate that with your colleagues?

One of our favorite buzzwords in business schools is innovation. We love innovation. The problem with innovation is innovation comes in two flavors. There’s ‘big I’ innovation, the disruptive, radical, Uber kind of innovations. Then there are ‘little i’ innovations, the tiny innovations, what you might even consider part of ‘Kaizen‘ continuous improvement, like an obsession with getting better. A lot of organizations underappreciate how to do that.

I think it’s going to be a period of ‘little i’ innovation, lots of it both on the employee side with productivity and the supply chain and all that. But also on the customer-facing side.

The part I find interesting in this context is that businesses know how to add or they know how to subtract, they don’t know how to do both at the same time. And inflation is a period where you need to learn to do both at the same time.

Read a transcript of the full conversation.

Read a 2019 Harvard Business Review roundup of ideas for surviving a recession and thriving afterward.

Read our briefing on Gulati’s book Deep Purpose from earlier this year.

Read more from Charter

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