The Importance of Investing in Leadership Development During Economic Downturn & Recession

HR Leaders Reveal Why They’re Protecting Their Leadership Development Budgets

Most economists agree that there’s a high likelihood of a recession within the next 12 months. Increasing global inflation and anemic growth forecasts suggest worrisome conditions ahead. Many countries are close to, or already slipping into a recession, and a full recovery doesn’t appear likely for many months.

Previously, during difficult times, many organizations would rely on cost-cutting measures that impacted talent, such as pay cuts, furloughs, and even layoffs. Businesses also have historically looked at other areas where they might be able to cut expenses in their budgets for the next fiscal year, and one of the biggest areas for budget cuts has often been training and development.

While such cuts can result in short-term expense savings, reducing training and development — especially leadership development — can have negative long-term effects, especially given the challenges of leading in the new hybrid workplace environment at many organizations.

With the pandemic driving talent shortages around the globe in nearly every industry, and the ensuing “Great Resignation” keeping turnover rates high for most organizations, furloughs and layoffs may not be the de facto cost-cutting measures they once were during downturns and recessions. With the arrival of more flexible work arrangements, a significant challenge for many companies over the past 2 years has been recruiting and retaining talent.

A resilient jobs market with unemployment rates near half-century lows have made talent shortages very real for many companies. As a result, layoffs will likely be a tactic of last resort in the upcoming downturn for most organizations who are already struggling to find and keep the talent they need.

Additionally, your top talent powers your organization’s growth both during and after an economic downturn, and you need to ensure they have the skills and competencies to survive and thrive. Developing and retaining top-performing employees is essential in any business strategy, and especially during a time of economic uncertainty.

Development opportunities are also one of the biggest proven drivers of employee engagement and retention, so providing access to leadership development even during downturns will not only help your organization keep the leaders you already have. It will also help your organization weather the economic storms and position it for success as it navigates out of the recession and back into growth.

Our Survey Findings on Leadership Development Budgets During a Downturn

With the threat of a possible recession looming in the fall of 2019, we surveyed 300 HR leaders from both domestic and multinational organizations. These buyers were asked about their concerns of an economic downturn or possible recession, how their overall leadership development budget would be affected in a downturn, and the business impact to the organization they expected from an increase or decrease in leadership development spending. The results are summarized in our research report benchmarking the state of leadership development spending.

Many of our findings from 2019 are just as applicable to the situation organizations find themselves in today. And we discovered that organizations are continuing to prioritize investments in leadership development in the 2020s because it can:

• give them a competitive advantage (a full 82% of respondents said this),
• help them achieve their business strategy, and
• improve their ability to attain their goals, even as the economy is shaky.

Typical investments in leadership development vary. Our research found that the median overall budget for leadership development is approximately $350,000. Nearly 40% of the organizations were spending more than $500,000 annually on leadership development, and almost 20% were spending more than $1 million a year on developing leaders.

Budgets are largely staying the same. In 2019, the majority of the HR leaders surveyed maintained the same budget levels as the year before, and over 1/3 of those surveyed increased them. Prior to the pandemic, most (57%) reported they still plan to keep the same budget levels as the previous year, and nearly 40% expect to spend even more on leadership development for their workers in the next year. Only 5% of the respondents reported they were expecting a decrease to their leadership development budgets.

HR teams are doing contingency planning. While the HR leaders we surveyed felt optimistic about the future of the economy, over half were also making contingency plans for their businesses. The prevailing attitude was to “plan for the worst and hope for the best.”

We asked HR decision-makers how their spending strategies might change in the event of an economic downturn and found the number of organizations who said they would cut their budgets (30%) was almost offset by those that said they would increase budgets (27%). Furthermore, many organizations in the survey (42%) said they would try their best to maintain their leadership development budgets in a downturn or recession.

“Effective leadership is valuable no matter the health of the economy,” noted one respondent in our survey, a senior-level HR leader from the healthcare industry. “Leaders need to be flexible to make decisions in any environment.”

Budgets for developing top leaders and “high potentials” will likely be preserved. While development budgets were expected to remain more or less the same across leader levels in a slowdown, we found that budgets for development of senior-level leaders were slightly more likely to be protected. This may be because these leaders will be the ones expected to lead the organization through the current crisis or downturn and position the company to take advantage of opportunities as the economy recovers.

Similarly, we also discovered that most organizations said their high-potential employees would continue to receive development during a downturn. In fact, 42% of respondents said they planned to increase the leadership development budgets set aside for their high-potential talent. Interestingly, this was even more prevalent among newer organizations that have been in business for 20 years or fewer.

Why Protect Your Leadership Development Budget in a Downturn?

HR leaders we surveyed noted that it’s critical to protect leadership development budgets during an economic decline. A majority, 70%, said they feel motivated to protect their budgets because of the many benefits leadership development provides to the organization.

The top benefit they identified of continuing leadership development in a downturn is better-trained leaders and ensuring a strong leadership pipeline is in place, which is consistent with the many reasons organizations invest in leadership development.

As an HR leader in the aerospace industry told us, “Well-educated leaders can run a more efficient business. They can motivate and engage their employees through a recession, therefore improving retention and cutting down on employees leaving the company. Better educated managers typically have more engaged teams. Better engaged teams have higher customer satisfaction and profits.”

Strong leadership will give an organization competitive advantage and better prepare it for growth in the recovery. Another motivation is to ensure the organization has an adaptable, efficient, and agile workforce in order to implement the business strategy and direction. Fortunately, online learning for development offers many (unexpected!) benefits, and at CCL, our research has found virtually equal client satisfaction with our in-person and online programs.

Cutting Development Budgets Creates Challenges

The research also found that nearly 90% of the organizations that expected to be asked to cut their leadership development budgets in a downturn also believed that the budget cut would create a moderate to strong challenge to the success of their organization in the future.

Over half of our respondents, 55%, said they believe a cut in leadership development budgets would produce significant challenges, some with long-term effects lasting far beyond the current economic downturn. The biggest consequences of cutting development budgets were identified as:

• issues with employee morale and engagement;
• increased turnover;
• a weak leadership pipeline;
• a less skilled workforce;
• inability to attract new talent due to a lack of development opportunities;
• increased costs/resources required to hire and develop new talent;
• decreased training innovations;
• competitive disadvantage as compared to other companies who continue to invest in their leadership development efforts; and
• inability to take advantage of any new business opportunities that arise.

According to an HR leader from a financial services company, “I think a budget cut will have a sizable impact as it is related to staff morale. There will also be a loss of ideas for innovations.”

Another respondent in the professional services industry worried about decreased budgets having an adverse effect on employee retention, saying, “I feel that my team relies on training and would perceive negatively a decrease in budget. I also feel that other firms that do not decrease training could then lure employees away.”

Investing in Development During Good Times & Bad

About the same number of organizations in our survey said they would decrease their budgets during an economic downturn as said they would increase them. Furthermore, most reported they are motivated to protect leadership development budgets, and the majority believe a cut would create a significant challenge for them.

Organizations that continue to make leadership development a priority will find it gives them a competitive advantage, helps them achieve their strategy, and improves their ability to attain their goals. Because leadership development is so closely linked to an organization’s success, investments will continue to be made in good times and in bad.

During the impending downturn, top organizations will continue to budget for leadership development, particularly for their high potentials, and will prioritize options that can either be delivered digitally or brought in-house.

Ready to Take the Next Step?

If your organization sees the tremendous value in continuing to invest in development during a downturn, we’re here to help. Partner with us for customized leadership development, or leverage our world-class, research-backed leadership development tools and training materials to support your internal initiatives.