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Jan 30, 2023

In economics, inflation is the big, bad bogeyman.

Inflation suppresses wages, suppresses spending; makes supply side costs rise, and causes prices to then go up even further. And yes, before you know it, a difficult spiral can be gotten into that’s hard to get out of.

It explains why the Federal Reserve has – since last summer – been gradually raising interest rates.

To some extent it’s been working.

Recently, the Labor Department reported that the Consumer Price Index (CPI) was up by 7.1% compared to the previous year in November. This is down from a 7.7% gain in October, and the immediate outlook is that inflation will ‘cool’ as we move deeper into 2023.

But make no mistake. Higher than normal inflation is still here to stay for some time. Last June’s rate (9.1%) represented a 40-year high, and before 2022, inflation hadn’t gained more than 8.3% on a year-over-year basis in any month since 1982. Not surprisingly, employees are still feeling this.

Overall inflation is still outpacing wage inflation (wages are up, on average 5.3%), meaning that in November 2022, the average US household spent $396 more per month to buy the same goods and services it did a year ago. Inflation is, concluded a recent Moody’s Analytics report, “still painfully high”.

But here’s something you might not have thought of – that clever HRDs can actually use high inflation to their advantage.

As counter-intuitive as this may sound, it’s the viewpoint held by former Harvard Business professor Ram Charan.

Charan, considered by some to be one the most influential consultant today, says companies who avoid layoffs will find a silver lining in inflation – but only if they put the groundwork in fist.

So what is this? TLNT decided to find out. We spoke exclusively to him:

Q: Let’s straight to the point – you say inflation has a silver lining. How is this so?

A: What we often tend to forget is that a large amount of innovation typically come from times when we see high inflation and/or recession. It’s highly likely that inflation will continue to be higher than businesses want it to be well into 2024. This mainly because it takes time for the actions of the Federal Reserve to work their way into the wider economy. I can even see high inflation lasting longer than this. All of this means organzations simply have to see it as ‘business as usual’ and decide what their suitable response to it should be.

Q: What responses do they have available to them?

A: Obviously, there’s the do-nothing response. But this isn’t very useful. In times of high inflation I argue that organizations need to re-tune themselves, and do everything they can to become what I call ‘fighting fit’. Now is the time to renew efforts on things like training and development and innovation creation because what businesses really need to do is generate cash. It’s my belief that companies need to actually cherish the change of focus that inflation forces them to consider. This change of focus – which might appear painful at first – is actually an opportunity. It doesn’t tend come at any other time, and so the opportunity needs to be grasped.

Q: What considerations would you recommend companies/HRDs take?

A: To me it’s a case of working out what the new opportunities that come out of the times we’re in will be. My clarion call would be for HRDs to only invest in teams of people that are focused on mapping out the future – that is working out how segmentations might change; working out new ways to work with technology; and working backwards to experiment with different solutions.

Q: This all sounds good, but isn’t the problem that companies won’t have money to burn to invest in these sorts of activities if inflation is running so high?

A: I accept the view that most companies are in survival mode at the moment. Inflation clearly means wages cost more, which in theory, leaves less money floating around for other things. But my point is that this is the time HRDs need to really seriously think about the future they want.

Q: Are you saying don’t invest in ‘things’ but invest in people?

A: The worst thing companies can do in inflationary times is be accumulating even more debt. That’s common sense. They need to be generating more new cash, and so it’s almost incumbent on HRDs to work out their people’s contribution to creating more cash. Companies sort of went a bit crazy when there was very low interest rates – taking on investment (ie debt). So now they are in a liquidity crunch. The balance sheet has been put in jeopardy. Now is therefore the time for everyone to step up.

Q: Investing in people also means investing in top talent. So won’t this be made harder in such inflationary times

A: This is the crunch bit! If organizations are serious about their next phase, they need to accept that top talent will cost more. But if recruited properly, top talent more than pays its value back. The key job for HRDs this year is to work out, and more seriously define, what they mean by ‘critical talent’. This is talent that is critical for their business model, and critical for what they need going forward.

Q: This sounds like more than just a pay issue – is it?

A: Absolutely. Critical talent tends to stay with a company not because they are necessarily paid more, but because they love their boss, or love the organization. HRDs need to ask themselves some searching questions – like ‘Are they promoting their key, and critical talent before someone else poaches them?’ Or ‘Are they doing enough to engage them?’ If HRDs do these two things, they can more or less not have to worry about their talent – even in inflationary times, when there is a lure from other companies able to pay them more.

Q: What last pieces of advice can you give?

A: If there are situations where companies can’t generate cash quickly enough, they may have to accept that they need to sell what they don’t need. Companies may have to accept that they need to be smaller in the short term, to be better equipped, and more agile for the fight in the longer term.