One of the quieter voices heard in corporate circles these days is a frustration about economic policy. Our leaders don’t want to criticize a government that has a tendency to punish critics, but the current policies are really bugging them.
Their problem, which is completely understandable, is that the policies keep changing. Nothing manifests the changes more visibly than tariffs: They are on, then they are off, they are doubled, then they are renegotiated. They are targeting countries we see as adversaries and then targeting our closest allies.
Tariffs cut both ways for U.S. businesses competing for U.S. customers—think the auto industry—because while they hurt foreign competitors more, most all U.S. businesses, especially retail, have a complicated supply chain that involves buying components from abroad. When tariffs change, that changes our prices and the demand for our products in ways that are hard to predict.
Then we have all the other aspects of economic policy. Federal government spending cuts hit private sectors suppliers to the government. Tax policy changes affect consumption and demand, also the likelihood of inflation. The new mercantile approach to business could be even more challenging: will the government permit us to acquire that company or do business with this one? If so, what do we have to do to get approval, and will it demand a financial stake in our company to get it?
One response to this, probably the obvious one, is just to say, “everything is so uncertain that we can’t plan. Instead, we will put everything on hold.” When business plans stop, workforce plans do as well. When enough companies do that, we get a recession. We can’t predict whether that will happen or even whether we are in one now – in part because the government and its data collection is shut down. But that is why hiring has stopped, and when hiring stops, that means other things are stopping as well.
Here is a reminder, though. We haven’t been able to plan for decades. Perhaps more accurately, plans simply have not worked. Think back to the 9/11 attacks and the recession, modest as it was, that followed. Then the massive Great Recession, where it took two years to realize it was a banking crisis, not a regular recession, that would take more years to clear. Then COVID, which we were first told was just a little flu, and then it shut down the planet. Then we thought it would be over in a few short months. Then we thought the economy would be in recession after pandemic restrictions were lifted, when in fact, the recovery was so big that inflation became the real problem. During all those times, we planned. It’s just that the plans were wrong.
It wasn’t a good thing that we planned and were wrong, nor is it a good thing now that we can’t plan. It’s just not new. Business forecasts have been lousy predictors of the future for decades.
What we have to do to make progress and avoid being stuck in neutral is to get over the expectation that we can predict the future and use that prediction as a guide for big investments. That means taking the notion of uncertainty seriously.
Uncertainty is different from risk. We may not have the ability to predict when or even if someone will have a car accident, but we have enough information about people like them and their experience with accidents so that actuaries can give us a good guess and if you are insuring them, put a price on it. That’s risk, and we can manage that in a straightforward way. Uncertainty happens when we don’t have enough prior experience to build good forecasting models. The fact that President Trump was president before does not give us much of a clue as to what he will do next except that it will be hard to predict.
So, how do we manage uncertainty? My colleague Paul Shoemaker gave us a good start in that direction by creating scenario planning decades ago at Royal Dutch Shell. Here, the idea is that our best guess is not likely to be good, so knowing what our second-best guess is becomes important and possibly our third best as well. If there are some implications in common for all three, then we are pretty safe acting on them.
Then we turn to the idea of hedging our bets. If our second-best guess implies something terrible, even if it’s not that likely to happen, we might want to do something about it as a form of insurance. For example, our business is down and our Board wants layoffs, but we aren’t so sure how long it will stay down. The evidence is that if you miss the upturn, your competitors who caught it will eat your lunch as some businesses experienced with the unexpected speed of the post-pandemic rebound. So maybe rather than layoffs, we use furloughs and try to keep employees with us. Rather than dumping our recruiting function because we don’t expect to be hiring, we keep at least some of it on board.
We make decisions like this in our individual lives all the time. We buy insurance against events we don’t expect, but that would devastate us if they happened. We pack a small umbrella when there is just a chance of rain rather than packing a raincoat and our golf umbrella, which we would do if we were sure it was raining. We can do exactly the same thing with workforce planning if we are handed a forecast that we know is a guess.
Maybe we can nudge our leaders in that direction just by introducing the notion of scenario planning. It gives one a sense that the future is not completely uncertain and that at least we can put some parameters on it that allow us to stop doing nothing. Pausing is one thing, but no one was ever a real success by doing nothing.
Peter CappelliGeorge W. Taylor Professor of ManagementDirector - Center for Human Resources for the The Wharton School