Business outlook for 2008

by 22 Jan 2008

2008 will present business with a number of evolving and complex challenges. Craig Donaldson speaks with IBISWorld chairman Phil Ruthven about these challenges and related issues for HR

One of the most obvious issues for business in 2008 will be planned changes of the new Labor Government, to IBISWorld chairman Phil Ruthven. While Labor is traditionally a union stronghold, he notes that only 18 per cent at most of the workforce are actually union members, and this figure is unlikely to increase in the years ahead.

“I think unions are basically heading south – the same as they have done in America – and there will come a time when union membership will be below 10 per cent and that will probably occur within the next fifteen years. So, in looking at labour market changes in terms of rules and regulations, I think union muscle and union ideology is a real worry,” he says.

The business world has been quite terrified of union pressure and enterprise bargaining coming back into the fold, Ruthven says. In abolishing WorkChoices, he says the business world is going to be quite nervous about what is put in its place. “To ban contracts and contractualism would be a very regrettable move. The entire developed world is moving towards individual contracts.”

Candidate shortages

Another major challenge for business will be candidate shortages, and with full employment levels, Ruthven says it is a candidate’s market. “There would hardly be a HR department in the country in 2007 that hasn’t had some difficulty in getting enough applicants to apply for a job. Once upon a time it was the other way around,” he says.

“When it was the buyer’s market you’d get 50 or 100 applicants, and you’ve got the long, slow process of picking out the candidate you want. I mean, there have been instances in 2007 where you can’t even get a single response for an ad. That’s pretty rare, but that has happened,” Ruthven says.

The rise of organisational culture

As a result of full employment levels, Ruthven says that organisational culture as a business issue will become more important in 2008. Companies will need to think about their culture as part of its strategy for attracting and retaining people, he says. “Do you have an organisational culture which is on the positive side – the sort of culture which encourages employees to want to come to work every day and enjoy it? By the same token, it should encourage new people to join your organisation, rather somebody else’s. That’s the bottom line of what organisational culture is all about,” he says.

One of the major hazards to a good culture is the sociopath, and Ruthven says HR departments and managers have to be alert to the damage sociopaths can cause in an organisation. And with full employment, it is more critical than ever to make sure that any sociopaths aren’t in a position where they can damage organisational culture, according to Ruthven. “If you’ve got sociopaths in positions of senior management – and that’s where they often end up, because sociopaths are usually quite cunning – they can quietly destroy morale and even affect productivity.”

CEOs and organisational culture

Organisational culture is shaped largely by the CEO and the executive team. Changing organisational culture can take years in a large organisation, and a major problem with culture change in such instances is short-termism as it can often be difficult to get CEOs to see the bottom line benefits of culture change.

“I wish I could say that all those highly paid, contracted CEOs do get the importance of culture, but I’m not sure they do,” says Ruthven. “In my view, many of them are hired because they’re ruthless cost-cutters and the like, which sometimes a company unfortunately does need, because it has been allowed to drift down into a very dangerous position.”

Things are changing as more generation X managers and executives come through the ranks. This generation appreciates the importance of organisational culture more so than the baby boomers, according to Ruthven.

CEO salary levels

There has been a lot of criticism in the past few years about high salaries paid to CEOs, but Ruthven says that this criticism is by and large not justified. “In 2007, the Australian listed companies set a new world record for performance. If you take the top 30 listed companies on the New York Stock Exchange, which has held the world record now non-step for at least 20 years, and then look at Australia’s 30 largest listed companies this year, the top Australian companies set a brand new record for performance,” he says.

The top 30 listed Australian companies earned a 26.3 per cent return on shareholders’ funds after tax on a weighted average return, according to Ruthven. This broke the previous record, which was set by the New York Stock Exchange back in 2000 when the top 30 companies earned 25.2 per cent.

“The point I’m trying to make here is that Australia has just set a brand new world record for stock market performance on a global basis. So if one does believe that leaders make a difference, then the rapid increase in salaries that has been awarded to CEOs must have had a lot to do with how we achieved that record,” says Ruthven.

“So the very high rewards being paid to CEOs is a signal to me that the board does recognise the importance of leadership and they have been justified in recognising that, because we’re setting new world records here.”

Is HR on the agenda?

HR is slowly but surely making it onto the business agenda, according to Ruthven. “The only guide I’m getting is that there seems to be a few more articles being published in business magazines these days on HR and top HR managers,” he says.

“That’s not a lot, but enough to suggest that HR is slowly gaining importance. I think there are always lead lags in the course of history, and in 2008 I think we will see even more publicity given to HR than we saw in 2007.”

It may take another several years before HR regains the importance that it had, for example, back in the 1970s. “You’ve got to go a long way back to find when HR was one of the princes of the firm, if I can put it that way, and that’s because we ran into massive labour shortages with the boom that took place under Labor then.”

So in the mid-’70s, HR was suddenly the princes of the company, because, Ruthven says, a lot of boards thought if they could get enough people, then everything would be fine. Some HR executives even made it onto the board, which was unheard of at the time, and Ruthven says this way well start to happen again leading up to 2010.

HRs challenge

As HR is called to positions of importance, HR must be able to meet and deliver on business expectations. “HR has to be much more multi-skilled than they have been in the past, especially in the areas of finance and strategy. If you don’t know what the strategy of the company is and why it is what it is, then you’re not in much of a position to be able to help fashion the people side of that strategy,” Ruthven says.

Unless HR is able to improve its business knowledge and skills, it becomes a necessary evil in the minds of boards, he says. “That’s a terrible position to be in, because HR has got such a positive role to play.”

Rising to the challenge

As HR improves its business skills and knowledge, so too will its ability to talk the language of the business. HR’s ability to be able to present their case in an interesting and convincing way to CEOs and boards is vital, according to Ruthven.

In speaking the language of the business, HR will be able to market itself better to others within an organisation. For example, he says a quality control manager is not the most exciting or glamorous of jobs, but it is critical to the smooth running of any company and HR needs to be able to let business know this in its own terms. “Who wants to be in quality control? But it’s how well you market that to top management, to show why it’s so important,” he says.

“The lack of quality control means your company can go under – a bit like those toys that had the wrong chemicals on them recently, which could just literally just wipe the company out. So without quality control you’re in strife, and the same goes for HR. If HR does not go well, the possible damage is too horrible to imagine.”

Future issues for HR

If HR is unable to step up to the mark, then managers from other functions who are not trained in HR could head up HR departments in the future. Similar to law and accounting firms, who have always had a lawyer or accountant come up through the ranks to head the firm, Ruthven says that some firms now have CEOs at the helm who are not lawyers or accountants.

“More and more of them have got non-lawyers acting as the managing director, because they realise that lawyers are singularly unprepared to be trained to be good CEOs. I just wonder in some cases where there is a large HR department, does the HR manager have to be a HR person? It may well be that they don’t.”

Business challenges for 2008

The new year looks set to challenge Australian businesses, with interest rates and petrol prices the primary concerns for executives in the quarter ahead, according to Dun & Bradstreet (D&B).

The impact of the tightening credit market on operations is also a concern and evidence of inflationary pressure continues with more than half of executives expecting to increase selling prices in the March quarter.

According to a recent D&B survey, close to two-thirds (63 per cent) of Australian business executives expect a hightening credit market to have a detrimental impact on operations. Meanwhile inflationary pressure continues, with 59 per cent of firms expecting their selling prices to be higher in the coming quarter than the corresponding quarter in 2007.

Executive concerns regarding interest rates remain high, with 26 per cent of businesses indicating that interest rates will be the most important influence on operations in the coming quarter. Retail executives continue to demonstrate the highest level of concern, with 38 per cent ranking interest rates as the most significant influence on operations.

Fuel price concerns have increased to their highest level in five months. Twenty-seven per cent of executives now rank the cost of fuel as the most important influence on operations. In addition, recent movements in petrol prices have had a negative impact on 63 per cent of businesses.

An increase in executive concerns regarding the tightening credit market, interest rates and fuel prices is evidence that business executives are beginning to face some challenges, according to Christine Christian, CEO of D&B Australasia.

“Australian businesses have been operating in a positive economic climate for an extended period of time,” says Christian.

“However with the prospect of higher fuel prices and further interest rate increases, the rise in executive concerns regarding key operational influences is to be expected. Businesses are also starting to feel the impact of the tightening credit market in the cost of credit and the ease with which it can be accessed.”

The employment indicator has returned to positive territory after one quarter in the negative. Thirteen per cent of executives now expect to have more staff in the quarter ahead than they did a year ago, while 10 per cent expect to decrease staff numbers.