The Business World: This downturn can have its upsides, if you're wise

Hamish McRae: 'Fear of a squeeze should be a useful spur'

This looks likely to be the first downturn of the truly flexible labour market.

This looks likely to be the first downturn of the truly flexible labour market.

The UK now has more people and a higher proportion of its workforce in jobs than at any stage of its history. But much of the expansion of the job market through the 1990s was in part-timers and people on fixed-term contracts. There is nothing wrong with that. Many entrants into the job market might not have come in had they been obliged to commit to full-time jobs; many people (though not all) prefer fixed-term contracts; and, crucially, UK employers might not have created as many jobs had they been forced tocreate permanent ones.

Nevertheless, the fact remains that if demand falls, it will almost certainly be easier to slim the payrolls than it was in the early 1990s recession. That may make for a more responsive economy but it also means that in human terms this downturn may prove to be quite disruptive. There is, however, one other way in which the labour market is different from the market of 10 years ago. It is that human capital is more important relative to other forms of capital such as financialcapital or plant and machinery. You don't want to get rid of clever people just because of some temporary squeeze on margins, particularly since they may well go off to a competitor taking their knowledge of your business with them. The world may be moving back some way to the situation of the 1950s, when employers hoarded skilled labour during downturns to save the difficulty and cost of rehiring when demand rose again.

So it may be easier to get rid of people but it is also more dangerous to the medium-term health of the business. How might wise companies respond?

The trick in all downturns (and we can leave aside just how serious this one is going to be for we simply do not yet know) is to use them as a spur to do things that you ought to do but haven't got round to yet. So in the past companies have been spurred into closing marginal factories, slimming inventories, finding cheaper ways of developing markets and so on. Of course that will continue. But companies have been less inclined to use a downturn to review their human resources, except in a "slash and burn" manner. Companies got rid of people, sure, but evensophisticated companies tended to do so simply to meet aheadcount target and they often used crude methods, such as a hiring freeze, to get there.

The challenge surely is to do things better this time. But how? No businesses are the same but here are some ideas as a template into which they might fit their ideas.

First, the approach. Fear of a squeeze should be a useful spur to identifying staff capabilities. A few companies try to measure explicitly the intellectual capital of their people but most look at performance instead: whatpeople are doing and how well they are doing it rather than what is in their heads. Once this is done you can draw up one side of an intellectual balance sheet. Then you have to draw up the other side: what you need in terms of human capital. Put the two together and you may find there are skills and knowledge that - however wonderful - you don't need. Or maybe vice versa. The value is that you have a mark for managing any change in human capital requirements through the squeeze.

Next, the plan. The whole shift to a flexible labour market makes the management of people vastly more complicated. Coping with part-timers and people on short-term contracts is just the start of it. Many of the people a firm relies on are not employed by it at all: they work for suppliers, advisers or customers. Or they may be freelance.

So wise companies need to think about the whole gamut of key people and try to find a way of matching their corporate needs with the hopes and aspirations of these people.

Some examples. A firm might employ a team of researchers that it feels, for whatever reason, it cannot now afford. But many of these people may in any case want to change their relationship with the firm. Some may want to start their own business. Some may want to move to a university. The trick would be to find some way of keeping a hold on the intellectual capital of these people, while getting the costs off the monthly pay bill. This might involve helping them start their own business by giving them a contract to carry on researching. Or it might mean employing them part-time while they carried out their university research.

Another example is to look to non-financial rewards. A company wants to keep key people but cannot match the salaries being offered by a rival. So it talks to the people. Very often the thing that will keep them on board is not more money but more freedom and more fun. Help them have freedom and fun and they may increase their contribution - thereby justifying their having more money.

Still another example might be creative outsourcing. The new technologies offer ways of buying knowledge products from source around the world that mostpeople did not know existed. It also offers companies ways of selling to markets they could never previously reach. Suddenly there is a global market for brains whereas previously those brains had to be traded locally. So firms may simultaneouslyincrease the revenues of their people - and buy in skills more cheaply. But they can only do this if they know what they have got; and what they need.

So the process must start with an audit of human capital.Managing people cleverly is going to be one of the fewcompetitive advantages firms will be able to sustain in the next few years, for just about all else is becoming commoditised. It is difficult and time-consuming. But remember: managing cleverly through the downturn putscompanies in a pole position when the upturn comes.