Managing risk in a recession

Companies looking to manage their costs down during a recession usually look to two main areas: reducing their headcount and closing sites. But what many companies don’t know is that – unless such changes are very skilfully managed – they could actually increase their costs and deplete their talent base, leaving them ill-prepared to compete in a tough economic market.

It is an unfortunate fact of business life that companies struggling for their economic survival in a recession have few options other than to reduce costs through measures such as redundancy programmes and site or office closures. It would be natural to assume that the resultant savings in wage roll, liability insurance premiums and property maintenance costs are predicable.

However, there is often a failure to maximise on these savings due to an increased exposure to risks associated with poor change management and a potential increase in personal injury and other claims. Consequently, the associated insured and uninsured costs of personal injuries and claims can significantly erode any savings made – particularly in the short- to medium-term.

The range of issues that companies face includes:

• a potential increase in claims associated with closure and redundancy announcements – mainly personal injury claims under the employer’s liability policy

• a significantly reduced ability to prevent, adequately respond to, or defend such claims because of a lack of, or poor, documentation

• depleted human resources, including a ‘talent drain’ that reduces the organisation’s ability to take advantage of any recovery.

Higher frequency of claims

While by no means inevitable, an increase in personal injury claims by employees is associated with redundancy programmes. This can be for many reasons including deterioration in workplace controls during significant changes, reduced plant and property maintenance, and a decreased level of supervision by line managers who themselves may be facing an uncertain future. In addition, financial uncertainty and low morale can mean that claims are made by those who would not normally do so.

Sadly, there is also an increased opportunity and temptation to make fraudulent claims because the mechanisms that would normally detect this are lowered. Such claims rely on the fact that the company is in a state of flux (and recordkeeping perhaps being neglected), and therefore a claim is more likely to be successful. In one example, an engineering organisation was inundated with industrial deafness claims after a redundancy programme had been completed. Unfortunately, the employer had little option other than to settle as the relevant records had gone ‘missing’ due to poor record security during the change process.

However, by no means all claims are fraudulent or exaggerated. Unless there are good change management arrangements in place, deteriorating health and safety processes mean that the potential for personal injuries (and subsequent claims) can significantly increase.

Reduced ability to defend claims

The importance of high-quality documentation in defending and deterring claims cannot be overestimated. In England and Wales, personal injury and disease claims protocols require that relevant documentation be disclosed at the outset, and these can be instrumental to the successful defence of a claim. Although legal rules differ, this is equally important in other jurisdictions within the UK.

In essence the ‘corporate memory’ – which can be notoriously short term at the best of times – can rapidly deteriorate following the departure of key personnel as a result of redundancy. The maintenance of this memory usually relies on long-serving managers, so there are few options other than to document as much as possible prior to their departure. Unfortunately, and perhaps understandably, such managers may not be personally motivated to cooperate with the employer. Given that claims can arise many years after the closure/redundancy process has taken place, the ability to defend spurious or fraudulent claims can be seriously impaired.

Obviously, the best way to prevent genuine claims from being made is to prevent people being injured or made ill at work in the first place, and this should be the primary purpose of the occupational health and safety management system.

The other major cause for concern in this area is the neglect of crucial processes, which often happens if operations are not running as normal – for example, because a factory is being stripped of plant and machinery prior to closure. This neglect might take the form of general business decline and a reduction in maintenance standards or – at its worst – might see crucial processes such as health and safety procedures merely given lip-service or abandoned.

Depleted human resources

Redundancy is an obvious way of reducing costs in a recession, but this can be a high risk strategy unless well managed. Key among the risks is the loss of morale and loyalty of a workforce that knows its site or jobs are under threat and facing an uncertain financial future. Thus, poorly managed redundancy programmes can tempt those who would not normally do so to make spurious or exaggerated claims, and in extreme cases can lead to more serious acts such as theft, arson and sabotage.

The timing and communication of redundancy announcements is important from a risk management perspective. In one example, a premium aircraft product manufacturer told its staff in March that it was running a redundancy programme, but that the details of this would not be announced until September. It was therefore not surprising that the company experienced a ‘brain drain’ of its most talented and employable staff during the intervening period.

Another pitfall that dates back to the previous recession in the early 1990s is the temptation to let go ‘non-productive’ staff such as health and safety managers at a time when, arguably, they are more important than ever in controlling risks.

Perhaps the most critical aspect of large redundancy programmes involving a talent drain is the answer to the question – what is the strategy for recovery once the recession is over? The depleted skills-base and managerial talent may have resulted in lower costs, but this talent drain threatens the organisation’s ability to expand in line with a recovering economy. Because of this problem, it is interesting to note that many of the largest manufacturing companies have opted for other measures such as short-term working and even voluntary pay-cuts.

Proactive measures

Despite the daunting range of potential problems, there are a variety of practical measures that businesses can take to mitigate these risks (and thus control the costs associated with them).

Practical measures

The main way to tackle the problem of higher frequency of claims is through preventing illness and injury occurring in the first place. The maintenance of a well documented occupational health and safety management system should therefore be given priority in the change management process. Particular emphasis should be given to:

• the production and maintenance of high quality risk assessments that keep pace with changes in the workplace

• the carrying out of thorough and timely accident investigations, which focus on root cause analysis

• maintaining competence and training.

Reduced ability to defend claims is where many organisations fall down, but it can be well managed with a little forethought and planning. In order to maximise the ability to defend claims and to prevent fraud, the corporate memory should be maintained through measures such as:

• securing the position of high quality records relating to key areas of concern, such as risk assessment, health surveillance, accident investigation and training

• archiving such documentation securely, including the ability to retrieve individual records as needed

• taking photographs and/or videos of the workplace and key processes

• taking statements relating to working procedures and arrangements from line managers.

Arguably, the most important measures that can be taken when redundancies are under way are ensuring good communication and the provision of as much support to individuals as possible. This will help ensure that mission-critical personnel are not tempted to look elsewhere, and that those who are leaving are not unnecessarily disgruntled. Where site closures take place then the physical security of property and assets is essential.

A silver lining?

Good change management allows an organisation to maximise savings in expenditure, including reducing its exposure to a range of risks and associated costs. Indeed, provided that a business engages in the methodical and comprehensive risk management process at an early stage, it may even find that it can make a virtue of change by achieving process and efficiency improvements that will eventually allow it to take advantage of any recovery.