Friday, January 9, 2009

Avoiding Cost Cutting Mistakes

There is much written and taught about how to build your business. But what are you to do when you need to cut back? I've witnessed many a firm laying off staff and cutting expenses over the years. I've had to let people go in an economic downturn, and I've been one of the ones shown the door.

One thing I've concluded about the many cutbacks I've observed: It's not something we're particularly good at. I suppose that's understandable. We don't get much practice at it, fortunately. There are few, if any, books or courses or seminars on the subject. And who aspires to make developing their competency in cutbacks a personal goal?

Nonetheless, some of you are dealing with this issue right now. Each situation is different, but here's some general advice on how to avoid common cost cutting mistakes:

Don't focus on the short-term. If you must make tough choices, make them for the long haul. It's easy to get caught up in the current crisis and to look for short-term fixes. That's because the natural tendency is to try to minimize the damage. But this is a prime opportunity to make some much-needed changes to strengthen your firm for the future. Think strategically. What actions can you take now to both address the current budget and better position the firm to meet long-term goals? Avoid slipping into the "survival mode" where the focus is only on today's problems. Try to stay in the "success mode" where today's actions are designed to deliver long-term benefits.

Don't cut too little. This is a common mistake, especially with regard to staff reductions. When you hedge your decision hoping for the best case scenario, you risk unnecessarily prolonging the pain. One substantial layoff is better than several small ones. Cutting big-ticket items from the budget now is better than gradually reigning in expenditures over several months as the situation worsens. If you have to cut back, make sure it's significant enough to truly remedy the problem rather than mostly a symbolic gesture (like cutting coffee service instead of capital expenditures).

Don't start with the marketing department. We seem to be getting better about this, but marketing professionals are still among the first targets when layoffs come. It doesn't make sense on a couple of counts. First, why are you cutting business development assets when you need more business? Second, marketing staff cuts often don't really solve the problem financially. One of my clients recently concluded they needed to reduce their unusually high BD costs. I didn't disagree. But their first inclination was to cut marketing coordinators who represented less than 12% of their BD labor costs. What about the 88% expended by their technical staff? Was all of that productive? Of course not. That's where they first needed to look for cost reductions, perhaps by taking some people out of a sales role.

Don't reduce hours until you've cut underperforming staff. It sounds like a principled approach--save everyone's job and share the pain. But it's not, nor is it sound operational strategy. Your top contributors should not be punished equally with marginal contributors. They are the ones keeping the company afloat! While the intent is to be fair, it isn't viewed that way by staff. This leads to diminishing morale, which dampens performance at a time when you need better results. Most companies have a few underperformers who could have/should have been let go long before. Now is the time to do it, or else they may be an impediment to rallying staff to tackle the current challenges.

Don't fail to treat laid off employees with dignity. In recent years, there's been a growing chorus of warnings about disgruntled ex-employees sabotaging computer networks, stealing files, and doing other harm. So laid off workers are often quickly shown the door. Here's something you don't usually hear from your legal counsel: The best way to limit your risk is to treat people right. How did someone you trusted as an employee suddenly become untrustworthy? Allow laid off workers reasonable access to their computers and their files, casually monitoring their activities if you feel you must. Offer whatever support you can in their job search, and general help in making the transition out of your firm. I still keep in touch with a couple former colleagues I laid off years ago. I've heard of some who ultimately became a client to the firm that let them go. The Golden Rule applies here, and there may well be residual benefits.

Don't keep employees in the dark. Tough times often cause managers to retreat into seclusion. That's the worst thing you can do. The increase in closed-door meetings and conference calls signals impending doom to staff. Counter this perception by actively engaging them as part of the solution. Solicit their suggestions and their help. Keep them abreast of the situation, including sharing financial information. But remember to balance the bad news with positive news. Build hope; that's what will fuel a turnaround.

When the office I managed was facing tough times, we organized a series of lunchtime meetings for all employees where we discussed the situation and brainstormed ideas on how to respond. We jointly made decisions about cutting expenditures. We identified several cost-saving options. We talked about opportunities for new business. The only thing we didn't talk about was impending layoffs, although no one was surprised when they happened. It wasn't happy times, but the office soon rebounded stronger than ever. I'm convinced those conversations helped speed our recovery.

That gets back to my first point. If you're forced to cut back, make sure that it doesn't include the fundamentals that will keep your company strong for the long term. Think strategically, act boldly, keep positive, and treat people right.

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