Five damaging cost-cutting measures and their alternatives

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.

4 easy-to-spot tell-tale signs you can save on headquarter costs (4)

In the previous post, the oversized headquarters as one of the biggest organizational wastes was addressed. Oversized corporate departments are a black hole attracting valuable resources, scarce cash-flow and lots of energy.

I’d like to urge you again to consult your local managers and local HR. They can point to the waste in the organization in fine detail. But as I said, these good people are kept away from you by your army. Discuss the four topics in these posts directly with your local management. If they experience (one of) these, you know where to improve your organizational efficiency.

The first was complexity in the hierarchy of the organization. Do not sustain organizational hierarchies that ask for more than two reporting lines. Simplify them, and put responsibility back where it belongs. You probably can cut a few expensive positions along the way.

The second was about corporate visits. Check with local management how much time they have to spent on corporate visits, and what they do to prepare (required by the visitor as well as on their own initiative). Reduce the visits as well as the requirements for preparation to a minimum.

The third post addressed additional data requests from corporate. Check with your local management what kind of data requests they receive, whether they serve any real purpose, and if so, whether the time spent on it (both locally and in corporate) justifies the benefits.

In this post I’ll address the fourth and last topic – specialized corporate departments. Check your full organizational chart, and look for the corporate departments. You know you have considerable waste in your organization when:

the org chart for corporate resembles a labyrinth.

You’ll be surprised how many organizations have corporate departments serving the same purpose. Especially if they are working independently from each other, they tend to triple the complexity around that topic. For example, some organizations have two or more internal audit structures. They will waste time on duplicating work, competing with their twin department (such as spending time on proving the other one wrong) and pulling at the same resources.

You will also often see specialized departments taken out of the department they originally belonged to. For example training and development sometimes is taken out of HR, and made into a separate department with its own VP and other high level managers. Again, time is wasted on duplicating work, competing with each other, and fighting for the same resources.

Another interesting approach is checking the number of pages of policies in the organization. In case the organization has more than 250+ pages of policies, you’ll find that many are unnecessary detailed intricate solutions for imaginary problems you never heard of.

These three problems almost always stem from only two root causes:

  1. internal conflicts between high level managers were not adequately solved, but patched by letting someone satisfy his or her own ego by establishing a separate department.
  2. a (part of a) department didn’t deliver, so an additional department was established to achieve the desired result.

In both cases, the underlying problem wasn’t addressed. Often out of good intentions: people didn’t want to hurt an underperformer too much, or didn’t want to blame someone specifically. However, these patches lead to inefficiency and corporate waste, and are therefore unnecessary expensive.

Solution

  • check which corporate departments serve the same purpose, and reduce them
  • check which corporate departments are responsible for a small part of what another department should be responsible for, and combine them
  • check which policies do not make sense or are over-complicated, and start cutting overhead in the department end-responsible for these policies
  • in the future, make sure underperformance or internal conflicts are properly solved, and do NOT result in adding a new corporate department

At the end of this series, let me emphasize once more: your local managers and local HR can point to the waste in the organization in fine detail. You won’t be able to get this information from your corporate army, who usually won’t do anything to jeopardize their own position. With these four posts, you know where to improve your organizational efficiency.

4 easy-to-spot tell-tale signs you can save on headquarter costs (3)

In the previous posts, the oversized headquarters as one of the biggest organizational wastes was addressed. Oversized corporate departments are a black hole attracting valuable resources, scarce cash-flow and lots of energy.

I’d like to urge you again to consult your local managers and local HR. They can point to the waste in the organization in fine detail. But as I said, these good people are kept away from you by your army. Discuss the four topics in these posts directly with your local management. If they experience (one of) these, you know where to improve your organizational efficiency.

In this post I’ll address the third topic – data requests by corporate. You know you have considerable waste in your organization when:

corporate regularly asks for additional data that has to be gathered manually locally.

To give you a real-life example: in a big international organization, local entities get a new request for information from corporate. This request is outlined in a three-page email which:

  • explains in excruciating detail who has to submit what to whom before which date;
  • contains a 10-slide Powerpoint with intricately designed multi-colored pictograms showing how this data request fits in the global strategy;
  • lists instructions on how to fill the data request template containing detailed definitions attempting consistent data submission across all entities;
  • for that same purpose it also has elaborate scoring matrices to classify the data in pre-set categories, not allowing local entities to deviate, even if they don’t have the data available according to those categories, or when the categories don’t make sense for their local situation.

Most top managers like as much kpi’s and data as they can get their hands on. It gives an (often false) sense of control. Yes, you need the right kind of information to base good decisions on. But you need to weigh the amount of effort put into data gathering against the benefits. Often people don’t realize how much time and energy is spent on data gathering. Even when there’s a good ERP system in place.

To give you an idea of the time spent on a simple data request, know that for every hour per month that local managers spend on generating these kind of reports for various corporate departments, they need an exponential additional amount of time for:

  1. answering questions that come up because the data is being (pre-)analyzed by people who don’t understand the context;
  2. arguing to adjust the conclusions the analyzers wrongfully draw from data they still don’t fully understand;
  3. influencing the inevitable catastrophic decisions coming out of those wrong conclusions;
  4. when bad decisions are made on the basis of wrong conclusions, they need to adjust those decisions creatively, in order to implement something workable for the local organization;
  5. during implementation they need to have endless conversations with employees to keep them from becoming fully disillusioned with the useless changes, to keep attrition down, while maintaining focus on the business goals they have to achieve despite the new changes;
  6. reporting progress back, restarting the cycle at 1.

Solution

Check with your local management what kind of data requests they receive, whether they serve any real purpose, and if so, whether the time spent on it (both locally and corporate) justifies the benefits. Cut those requests out when:

  • they are even half as elaborate as the example above
  • local managers spend more than an hour per month generating data and reports for various corporate departments
  • you hear stories about managers who, with a tired voice, ask their people to just submit invented or senseless data, because otherwise their department will look bad when corporate shows red crosses in the overview report every month indicating they have NOT YET submitted the required data (and remember, don’t blame the managers for this behavior, blame the corporate departments that put this kind of pressure on local entities)

For other savings, keep your eyes peeled for the next and last post!

4 easy-to-spot tell-tale signs you can save on headquarter costs (1)

I’ll begin with a warning. This post (and the next three follow-up posts) is only for the brave. If, as a manager, you have a strong tendency to overcontrol, micro-manage or have a deep need to know everything that is going on, this won’t be useful for you.

One of the biggest organizational wastes is to have an oversized headquarters. This black hole vacuums away valuable resources, scarce cash-flow and lots of energy. Unfortunately, most big international organizations seem to default to eternally growing headquarters. Top management likes the feeling of having a whole army at their disposal, an army they need close by.

But realize: this army, and the false sense of security they provide you, costs an arm and a leg. Not just in direct costs. The indirect costs of the inefficiency created by corporate is huge! As your army likes their comfortable seat, they will completely take over your interaction with the local offices. And there starts the problem, as you will not be made aware on the immense efforts needed to sustain the insatiable appetite of your army. Even worse, paradoxically, your corporate army (who you designed to be able to control the executive parts better) ensures you are out of touch with that crucial execution part of your organization. But how to know what you can cut, and what not?

It’s actually not that difficult! Consult your local managers and local HR. They can point to the waste in the organization in fine detail. Unfortunately, these good people are kept away from you by your army.

In this and the next three posts, you’ll find tips where to cut overhead. Discuss directly with your local management whether they experience these. If they do, you know where to improve your organizational efficiency.

The first topic is complexity in the hierarchy of the organization. You know you have considerable waste in your organization when:

employees in your organization have more than 2 official reporting lines.

Yes, there can be very good reasons for people to have two reporting lines (instead of the usual one). For example when a content specialist works in a business unit. Like HR. A local HR manager often reports to both the local business manager, as well as a regional (or corporate) HR manager. The local HR manager needs to support the business, while at the same time s/he needs to follow the strategy the organization has for HR needs. Fine.

But three, or even more, official reporting lines? I have never seen a situation where this makes sense. Coming back to the example of HR: sure, an HR manager can serve several business managers. But they shouldn’t all be official reporting lines. Make the reporting line to either a business manager higher up in the organization, or just to the HR manager. The same in a matrix organization. A local manager can support several business line owners, but again, that’s not the same as an official reporting line.

What’s the problem, you might ask, with more than two reporting lines? Well, managers responsible for different area’s in an organization, consequently have different priorities. Sometimes, inevitably, even conflicting priorities. Now, with several reporting lines, in reality, where lies the responsibility of juggling these conflicting priorities?

Right, with the employee who has these different bosses to serve.

But that responsibility does not belong there. Primarily, the managers who encounter a conflicting priority should resolve it themselves. If absolutely needed, they need to escalate to their bosses. But NEVER should they pass the buck to someone who is not in the position to resolve these conflicts. Someone who neither has the responsibilities, nor the means to do so. That employee will waste at least a third of her time on resolving the priority conflicts, apart from the time her line managers waste in turf wars.

Solution

Check your organization for employees with more than two reporting lines. If you find these, simplify the organizational structure. Employees can go back to the work they were actually hired for. And you can probably cut a few management positions, saving even more money.

For other savings, keep your eyes peeled for the next three posts!