Workforce reduction in the current climate

I LIKE READING the analyst commentary that follows certain company transactions and events. It's my favorite part of the hours I spend sifting through my daily email. I like the "additional color" the analysts provide. Lately, however, the rosy color washed over reports containing workforce reduction news has me thinking about the dichotomy surrounding the practice.

The oil and gas business is a capital-intensive one and companies, understandably, must communicate to Wall Street and investors that the downturn is viewed seriously and that swift action is being taken to cut expenses.

After the release of Weatherford's 2Q earnings report, Cowen & Company applied its "Outperform" rating. While WFT beat the analysts' expectations in terms of North American revenues and operating losses, it's odd to see such a rating placed in a note with the words "Weatherford raised its target for headcount reductions this year to 11,000 from 10,000."

Analyzing the same information was Jefferies. The analysts gave WFT a Buy rating, but did note that risks to the company include "the continued distraction to operations that can stem from undergoing considerable internal changes and headcount reductions." While the estimated annualized cost savings of over $700 million from the reduction is likely positive for investors in this case, raising the target on headcount reductions could have negative implications elsewhere.

I'm not picking on WFT. We've seen the headlines- Shell, ConocoPhillips, Chevron, Statoil, Technip, Halliburton-companies across the board are faced with serious challenges that require difficult decisions-decisions that include job cuts. When making such decisions, how much weight is given to results of actions spurred by downturns past?

Findings of a study of 54 US energy industry CEOs by KPMG nearly a year ago indicated concern about the talent pipeline. A standout statement from the study: Despite talent shortage concerns, "26% believe they have an adequate workforce and don't see disruption in the next three years."

Less than one year later…disruption indeed. Oil has shed over half its price and the industry is shedding workers. Cuts first circle the drillbit as companies lay down rigs. As the slump continues, so do the cuts. Reductions are made from the fields to city center offices as companies attempt to navigate an uncertain future.

Despite uncertainties, "we have to save talent," Thrust Energy's chairman and CEO James C. Manatt said, speaking at the Summer NAPE Business Conference on August 19 in Houston. In previous downturns, companies have mistakenly overcorrected when letting go of "gray hairs" and "young talent," he warned.

In a May white paper, EY discussed the importance of reducing costs in a structured and holistic manner, noting that every cost-cutting move companies take today (including workforce reduction) will have some impact beyond reducing spending.

"Unconventional companies that let go skilled workers with expertise that will be needed later may find the talent has left the industry or is now employed by a competitor. As the industry experienced after massive layoffs in the 1980s, gaps in the talent base can have a significant impact in later years. Additionally, a loss of people often results in a loss of some internal controls that reduce and detect non-compliance with policies and procedures," EY noted.

Companies may indeed be contemplating a history repeated. KPMG energy talent lead Angie Gildea told me that in discussions with executives, the current scenario-widely accepted as a downturn and not a short-term dip-has the majority acknowledging certain actions taken during previous downturns exacerbated the problem associated with the "Great Crew Change." Virtually everyone expressed a desire to do things differently, she said, but what we're seeing actually transpire sits at two ends of the spectrum. "At one end are those companies that unfortunately, have repeated actions of the past," she said. "Despite good intentions initially," she said, as an organization, such companies "didn't have the right data/information necessary to make more strategic decisions and were forced to fall back to old practices."

"Other companies may have reduced headcount, but have been more strategic," Gildea continued, citing planning models that take into account both long-term and short-term needs. One tactic is the concept of "flexible leave" programs that allow employees to take an extended leave of absence during which employers pay a reduced stipend and/or continue benefits for a specified period of time, allowing the employer to reduce headcount while still maintaining a connection to employees when the need arises to ramp-up activity, she said. "Overall," Gildea said, "the companies who are "doing it well" are typically those companies that had a strategic approach before the downturn."

Another approach is maintaining a presence at universities where companies traditionally recruit new talent. Colorado School of Mines told me that 51 companies slated for Fall Career Day in September are from the oil and gas industry. Said Jean Manning-Clark, Director of Mines Career Center & Employer Relations, "The unifying opinion is that as weak as it is now, the market will come back strong. These companies cannot afford to be without great talent when it does."