Almost all organizations go through tough times at least once during their lifecycle. Inevitably combined with unpopular cost-cutting measures. It often becomes necessary, for example when the organization still spends money where it’s not relevant anymore (even though it was very beneficial in the growing stages). Or when people have been allowed to slack in cost control. Many people see a cycle of increased spending followed by extreme cost cutting like a law of nature for business.
I don’t fully agree. Yes, cost-cutting measures are sometimes unavoidable. But the extreme measures many organizations take during difficult times often damage the organization’s future beyond repair. I have experienced several panic-mode decisions that should really be avoided. The five cost cutting measures below have the potential to cause damage for years. There are alternatives that will keep the damage to a minimum.
Extreme measure 1: Introduce additional authorization levels high up. For example make middle managers ask permission more than one level up for replacement of retirees or other leavers, or get new hires approved by at least three different managers. Besides giving the signal that just one manager wouldn’t be capable of making such a decision on her own, the lower level managers learn quickly to abandon all responsibility. In one organization that swore by this measure for a while, I’ve heard a top manager exasperatedly exclaim: ‘We need more entrepreneurship in this organization!’ If so, why treat your middle managers like children?
Alternative: Give people more budget responsibility, including a target to save costs. They have to get approval from their direct manager, and that should be it. Replace or fire the managers who can’t deal with that responsibility, instead of solving underperformance in this area by adding additional approval levels.
Extreme measure 2: Bring in expensive consultants that spend days interviewing employees, making spreadsheets, clinically analyzing the data, on which basis they suggest cost savings. Such consultants leave the organization with more chaos and uncertainty, by basing their conclusions on data the organization already has, but gets interpreted wrongly by outsiders who don’t know the organization at all. In calculating the cost-benefit of bringing in outsiders to tell you what to do, you need to include the decreased production, increased cost of errors, incidents, illness etc during and just after the time the consultants roamed your work floors.
Alternative: Ensure continuous improvement, in which you highly involve your employees (maybe even free some of them up for this purpose). They know the organization best, and you’ll be surprised with how much costs they can save once you give them the opportunity.
Extreme measure 3: Cancel all external training. Worse: replace it with training by internal “experts”. This is a very effective way to stimulate group-think, tunnel vision, and ensuring your organization soon only has diluted and outdated knowledge. Within two years, the organization’s competitive edge will shrink before your eyes.
Alternative: Identify what skills, knowledge, and qualities your organization needs the most, and keep external training for those areas. It’s a tougher decision than cancelling all external training, as someone will need to distinguish which training is more important, which is a shitty job. On the upside, the organization keeps up with (or stays ahead of) competitors.
Extreme measure 4: Fire several high-level managers, just to shake up the organization, make a point, or eliminate everyone seen as a threat. Popular approach especially for new top managers, recruited externally, with the assignment to shake up the organization. Their justification is that new ways of working need to be introduced, and severance payments come out of a special budget which doesn’t impact the EBIT. But the cost of upsetting a department by firing the manager, and the toll of paralyzing people into average behavior for months (if not years) to come does. Besides, the severance payments are costs nonetheless, especially if you include the cost of headhunting new people, inductions, interim managers, etc.
Alternative: Make clear to all managers what is expected of them. Establish a good communication where you frequently discuss their performance and that of their department. Good leaders can turn people around. And if someone is clearly underperforming, based on clear objectives, fire them fair and straight.
Extreme measure 5: Salary freeze for all employees. Especially if it’s for several years in a row. It can save a lot of money if you just look at the numbers. But in reality it screams ‘imminent bankruptcy’ to your employees, and has them applying for jobs to leave the sinking ship asap. It also increases the unfairness in salary distribution, as you can’t give raises to people who really deserve it or are behind.
Alternative: Demand HR to ensure a fair salary system, continuously. All big organizations have people whose salary has become too high. For example because it was never adjusted after a demotion, or several years of underperformance were not adequately addressed. Or after a merge the salary systems were not harmonized, and people in the same organization doing the same job get different pay and benefits. The unfairness of salary distribution is usually a bigger frustration with employees than the height of their own salary in itself. Address that on a continuous basis, and you don’t have to take extreme measures later on.
Not all extreme measures are wrong. For example, banning all (international) travel can work for a while. It’s okay to make people more aware of the costs of travel, and let them experience how much can be done virtually nowadays. Travel will always be necessary to a certain extent, but to stop travel for three to six months won’t damage an organization’s future.
When you are in a situation where you need to cut costs, consider very carefully whether the proposed measures aren’t damaging your organization’s future beyond repair. Have a look at the alternatives above. Most require a continuous focus on costs, which is the last important message of this post: Make sure you are on top of the important issues, and make sure your managers are on top of their budgets. Costs will get less out of hand, decreasing the chance you have to take draconic cost-cutting measures down the line.