This is an extension of my previous article on cost cutting. I thought of publishing it to offer my insights on how I arrived at the precautions (in my previous article), especially the three of the four thoughts I presented under “Precautions”. I’ve also provided the hyperlink to each of these two articles so that readers can easily steer and read them one after the other. Read my previous article on “Cost Cutting: Steps, Strategies and Precautions” here.
Precaution #1: If the CEO is not leading the project, it’s not worth pursuing it
In the past 2 years, I have helped organizations (up to US$ 50 million) improve performance, execute growth strategy and maximize their business value. In one of my assignments in India, I had the opportunity to serve one of my clients in the IT sector which had concerns with declining sales and operating margins. The President and CEO of this $33 million organization made a strategic move to expand their business to cloud computing, focusing on SME, USA. He made a directive to his Finance Manger to lead the cost cutting initiative and give him the updates on the progress such that he can concentrate on his business expansion project. Unfortunately, the Finance Head resigned to pursue opportunities outside the company, thereby forcing the Owner, President and CEO to delegate the cost-cutting project to his oldest employee, the next Finance Head. Being new to the job, the new Finance Head showed enthusiasm, commanding his team to meet the expectations of his new boss. But he committed mistakes on various lines, leading to a situation which the entire organization suffered.
This is when I came in to help them craft a 5-year strategic plan. The result?
- An operating profit of 35% at the end of 18 months, and
- A CAGR of 31% over the life of the strategic plan.
Precaution#2: A 10% cost reduction across departments may be inefficient
The “10% cost reduction” across the enterprise was a directive from the CEO. He ran 3 business units – System Integration, Managed Services and Cloud Sales – in India. The System Integration business was the oldest and most profitable, whereas the cloud sales wing 10 months old, contributing 13% to the total sales. So, when a directive of 10% cost reduction is given across departments, you can see the implications – the smallest and newest division (cloud sales) gets to keep 90% of the annual budget for generating 13% of sales (assuming the same performance), while the system integration business suffers 10% reduction, which forces it to cut down revenue generating initiatives (like marketing, advertising, restricting themselves to few distribution channels and product manufacturers, etc.)
Precaution #3: The concept of “right sizing”
As I had highlighted in my previous article, firing employees has a significant cost, both financially and spiritually, that can paralyze the long-term revenue growth. Studies have revealed that organizations perform layoffs out of desperation rather than through rigorous analysis. This is very obvious because when the performance pressure surmounts on the business managers, they tend to look at big numbers from a short-term perspective with the hope of “back to normal course” next year through rehiring for the closed positions.
This flawed principle also prevailed in this organization. The new Finance Head made a proposal to his CEO for a 10% and a 25% headcount reduction at the middle management and the lower management without making any rigorous analysis of the impact they will have in the organizational growth. Departments like sales, marketing, operations and administration took the biggest hit. Most of the jobs were merged, performance incentives capped at 100% and breaks (like tea/coffee, lunch and snacks) reduced with strict guidelines.
The result of this layoff scheme yielded shortage of human resources which extended the working hours of the remaining employees from 9 hours to 14 hours a day. To match the supply with the demand of the resources, micromanagement at every level was introduced; every employee’s activities (including middle manager’s) were strictly monitored.
What’s the outcome of this exercise?
Employees’ morale tanked, job satisfaction plummeted and the best workplace became harassment, leading to frustration and irritation for the employees, which eventually led to 40% increase in attrition.
So, what do they achieve? More cost savings or more losses?
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