Good management is about increasing sales, growing profit margins, growing people, and controlling costs. And over the past 100 years since the birth of “Scientific Management” by Frederick Taylor, more and more tools and techniques have been developed to accomplish these four important elements of business success.
And thanks to the development of financial controls as useful tools when the P&L needs fixing, cost cutting is an important and useful approach.
Control your expenses better than your competition. This is where you can always find the competitive advantage. ~Sam Walton
And while the costs of capital equipment can be amortized and depreciated over several years, one of the largest non-depreciating costs to a business is people and people activities (travel, training, benefits, etc.). Depending on the business sector, employee salaries and benefits combined are usually between 40 to 80 percent of gross revenues. That’s a huge amount of money and obviously gets the attention of those seeking to cut costs and increase profitability. And the most common approach is layoffs.
“If the only tool you have is a hammer, every problem looks like a nail!”
In order to make employee layoffs seem logical and “palatable”, modern management and consultants have come up with various ways of “spinning” the bad news. Such phrases as rightsizing, downsizing, restructuring, overhead reduction, business re-engineering, cost realignment, matching the market, reducing excess capacity, zero-hours contracts, and a variety of other employee layoff strategies are utilized. But the fact remains, it’s all about reducing employee costs.
Every cost reduction action has benefits (improved cost structure), but also comes with consequences, and sometimes the unintended consequences (collateral damage) can be great. Loss of respect for management, reduced motivation due to more work with fewer people, exiting of good talent, disgruntled workers and a variety of other consequences often negate the positive balance sheet impact.
And yet even with these many negative consequences, layoffs, cutting training and travel budgets remains the default approach to cost reduction and improving the P&L at many companies. The big problem is, these workforce reductions often result in short-term improvements in profitability, but in most cases do not lead to sustainable business success.
Not long after the layoffs, a really interesting dynamic develops. Managers realize they can’t get all the work done and slowly start hiring again. This behaviour promotes a vicious cycle: layoffs, delays in work production and quality problems, rehiring, build up of costs, next round of layoffs etc.
A Smarter Approach to Cost Control: Kill All The Pets
Winning teams have the least amount of distractions. They have a really tight group of people working towards the same common goal. ~ Larry Dixon
Suppose there was a better way to reduce a significant amount of cost and at the same time ensure a greater chance of sustainable business success? There is, but like everything else, it comes with a downside, and one that often makes the approach lose its appeal to managers and executives.
My experience after nearly 40 years of consulting on corporate culture, business effectiveness and turnarounds is that there are a large number of “disconnected initiatives” in almost every company that add no real value to the delivery of the business strategy. In many cases we estimate that nearly 35% of all ongoing projects and initiatives inside a large company are “disconnected” from the overall strategic business objectives.
When I state this to a CEO, usually he/she denies that is true in their company. Then we do an assessment and show them just a few of the high cost projects that are totally disconnected.
How can this be? It’s really very simple. Some are legacy projects begun years ago under different market conditions and a different business strategy. Some were acquired during a merger or acquisition and the leaders didn’t want to alienate those being acquired, but the intention to phase them out has been forgotten due to changes at the top and operational distractions. Some are pet projects of managers or executives who enjoy “untouchable status” in the company. Some are not projects or initiatives at all, but are actually work processes that add no value.
I recall early in my career talking to one very efficient but disgruntled executive secretary who informed me that a large part of her day was consumed with compiling a report for her boss that he never used. She even showed me the filing cabinet where she kept all these reports from over 10 years! And she said there were at least another six people throughout the company who spent a large amount of time helping her gather the data for this one report.
Why Do These Disconnected (and Costly) Initiatives Continue to Exist?
It’s really very simple. First, very few businesses actually map or keep track of all the initiative and projects going on at any one time, let alone the amount of resources used by these initiatives and whether or not they actually add value to the business or are connected to the current strategic objectives of the company. Mapping and listing all the initiatives is actually hard work, but when done can lead to a huge insight as to “where the costs really are”. Maybe it’s not headcount that is the culprit, but wasted time and resources (money and work-hours) on projects and initiatives with very little return to the business. What if you could redeploy all that time and cost into projects that actually helped deliver the strategy?
But the second reason for the continued existence of disconnected initiatives is the most interesting. The fact is, most executives and managers have a hard time saying No! Threatening to cut someone’s pet project or to eliminate a long-standing set of initiatives or work processes is not popular and takes real courage. We are all creatures of habit and cling doggedly (and mostly subconsciously) to our routines and work practices. In many ways they are our identity. And when an executive decides to cut or eliminate a project, there is a huge outcry. “Don’t you trust me to run my own area?” “We need to keep these people as they have a great deal of company knowledge and how to. We can’t cut them.” “We can’t abandon it now and lose all that time and effort.”
And so, with little information on the size and number of “disconnected initiatives” combined with the human factor of confrontation and disappointing hard-working managers and staff, most executives turn a blind eye to these costly and wasteful initiatives, putting their energies somewhere with less human hassle.
If 40-80% of operating costs is tied up in people and benefits, just think for a moment what an elimination of just 15% of disconnected initiatives could have on your company. Maybe you could deploy these people to more productive, revenue generating activities. Maybe you could use that money for innovation. The possibilities are many for leaders who have the courage to ferret out and eliminate “disconnected initiatives”.
“You can’t expense a company to health.” ~Les Wexner
Written and Posted by: John R. Childress
Senior Executive Advisor on Leadership, Culture and Strategy Execution Issues,
Business Author and Advisor to CEOs
Visiting Professor, IE Business School, Madrid
John also writes thriller novels!