By the time you read this, George Osborne's summer Budget will no doubt have been thoroughly analysed by economic, business and political commentators, and judged to be a mix of utter brilliance, social injustice or social utopia. Perhaps the announcement with most repercussions for our industry is that the "living wage".
The aim is to introduce a national living wage of £7.20 per hour by April 2016, replacing the current £6.50 minimum wage. The chancellor has pledged that this will rise to £9 by 2020 and apply to all over 25 years of age. A minimum wage of £8 will be in force by then for employees aged 18-25. Considering that wages have risen very little over the past five years, this will be a massive change and will present challenges to businesses to retain cost-effective production and remain profitable.
We are in a sector where labour already forms a significant proportion of total input costs and where other costs, such as production, are also likely to increase over the next five years. So how then should owners and senior managers respond and what will be the likely impact on our businesses?
Firstly, there are some positive aspects to this coming change. I have always believed that staff are your greatest assets. They deserve investment, attention and a decent wage, and may well repay you in motivation and performance as their wages improve. The new laws will apply to all businesses, your competitors included. They will face the same cost pressures as you. If you have to increase your prices, then in all probability your competitors will have to do likewise.
Secondly, to plan for the coming rise in labour costs I would advise every business to do a five-year "manpower plan". This involves having a systematic approach to work out where you want your business to be in five years, what staff you will need and where you will source them. Such a plan ensures that you are not wasting money on the wrong staff or experiencing skill shortages. When labour costs rise it is even more important to get the right number of people with the right skills in the right jobs at the right time.
Goals and objectives
What are your goals and objectives and how can you achieve them? Are you looking at expansion, exporting or diversifying? This plan will need to take into account your financial requirements such as marketing and operational costs and, of course, the people within your organisation.
You will need to identify how many people you will require, what skills they will need to have and how will you attract them to work for you. If you have done a five-year profit and loss forecast you should also know how much money you can spend on the people aspect of your business.
Having identified your manpower needs, the next stage is to audit your current manpower inventory. Do they have the skills to take you to where you want to be? Are they operating efficiently? Can some of their tasks be automated. And how many of them are likely to still be working with you in five years' time?
Having identified current and future manpower needs, you need a plan to fill any gaps. If you have skills shortages, will you implement a training programme for current staff or look to employ new workers with those skills? Will you personally change roles and learn new skills? If you need unskilled labour, how will you make provision for this - will you employ migrant workers and will you house them?
At this stage you are effectively designing your recruitment programme, and in today's world of open boarders, internet resources and social media your recruitment can be wide, creative and bold in its scope - and not too expensive.
Your five-year manpower plan essentially needs to involve ways to get the most out of current and future staff so that the increase in labour costs by 2020 will be mostly offset by increased efficiency and productivity, rather than by having to cut jobs or increase your prices. Put most simply, these are the options open to you and their possible outcomes:
- Employ more under-25-year-olds. Risky because you will not have the benefit of experience and industry skills, and you may contravene anti-age-discrimination employment law.
- Employ fewer people. May lead to drop in customer satisfaction and hence business.
- Employ fewer people but invest in more training and time-saving work practices. This can work but results need to be monitored. Can lead to high staff turnover if staff feel pressurised and a "ceiling" of productivity will be reached.
- Invest in training necessary/current levels of staff to increase sales and productivity and hence pay for increased wages. Should also provide surplus for reinvesting into business.
- Raise prices. This can work if customers also perceive an increase in value and service. Do you need to rebrand, for example, or aim for a different customer base?
- Reduce profit margins. Can be a short-term solution, but unsustainable in longer term.
- Have more seasonal or zero-hour contracts. Depending on your business and the skills you need, this can be sensible and cut wage bills. But you can end up with disjointed, untrained and unmotivated staff. In-depth training of zero-hour employees is not cost-effective.
I would never advise trying to work with fewer staff than your manpower plan says you need because you risk losing profitability, reputation and staff loyalty. Look instead at budgeting and investing in a robust and thorough training plan so that each staff member is fully motivated and contributing to the success of the business. This can be outsourced or run by skilled staff you already have.
Retaining experienced staff really does pay dividends, as does investing in the young, so why not look at some of the Government apprenticeship schemes and get some trainees on board who can bring new energy and ideas and cost you less? They may stay with you for years and bring new and contemporary skills to your business over a long period of time.
Many of us recall the introduction of the minimum wage in 1999 and the predictions of economic doom and job losses that never actually came about. I hope the incremental enforcing of the national living wage by 2020 will similarly not harm jobs and businesses in our sector but be a catalyst for growth and investment in a better workforce. If we can be prepared, we can make our greatest assets - our staff - even greater and better rewarded.
Neville Stein is managing director of business consultancy Ovation.