Could You Cut Deep And Fast?
One day (if not
already), we will face the need to cut costs fast in order to survive. Traditionally, this has been done by making
staff redundant as labour is generally a business’ single highest cost. Identifying and clearing away unproductive “dead
wood” is a continuing and vital activity, as long as the genuine “dead wood”
goes.
Traditionally, businesses start with “non-essentials” e.g.:
- Training;
- Advertising;
- Free coffee/tea;
- Other “fringe” expenses/benefits.
These may not amount to much (maximum 10%, of spend), but
represent a useful “tweak”.
The next to go will be any expenditure planned for new
equipment, unless this is vital to
continuing production.
Next come the “layoffs”: a numbers game in which even “better”
performers may no longer be required.
Some businesses still use a “rank and yank” system whereby, every year,
the bottom (say) 5% of performers are “asked” to leave. Scientifically, this sort of culling is
acceptable, but the risk is that it theoretically raises the performance bar
(surely a good thing?) every year until people are at the stage where they
spend more time massaging their results than working for the benefit of the
business.
Unless things are carefully planned and managed, the
inevitable result is a reduction in:
Morale;
Performance;
Customer service;
Productivity.
During the recent global financial recession, businesses cut
bit by bit. One UK bank kept making
small cuts and became know as the bank of the “death by a thousand cuts”. One assumes that management were trying their
best to maintain staff levels in the face of a crisis, but could, and should, they
have cut deeper and faster? It’s
difficult to tell.
Assuming that we decide to use the “deep and fast” approach,
what do we need to do? In my view, we
need to:
Understand our
customers.
Why do they come to us? What differentiates
us from our competitors (assuming we aren't the sole provider of that
product/service)? The airline industry
is a prime example of where cheap competitors offering a basic service have
undercut their more “expensive” rivals on certain routes or with certain
customers. Even established
carriers now compete on price on different routes and are cutting the “fringe”
benefits they offer to stay in the air. However, some people will pay for good service, a reliable carrier and fewer problems. They go “established”. Others just want to get there and don't mind
leaving/arriving in the early hours of the morning, how long it takes, or
carrying just a small holdall. They go
low-cost.
Understand our cash
flows.
Which products, services and people bring in the cash? Which are the "low-effort/high reward" ones (if any)? Once we know this, we need to…
Identify what’s needed
to preserve those cash flows.
If our business depends on frequent, repeated customer
visits, ensure that the people looking after customers are
well-trained and have the support they need to keep customers happy. These resources are both “physical” (e.g.
desk, phone, computer) but also “mental” (staff need to feel both empowered and supported in their work and that procedures support them and customers). Other “hygiene factors” such as free
tea/coffee, a place to unwind when not on duty, well-lit surroundings) are nice
to haves. Happy staff are motivated staff. Motivated staff look after customers
better. Customers who are well-looked
after are happier customers and come back
for more. We then move onto…
Understand where the
money goes…
Clearly, some must go on keeping happy the staff who deal
with customers. They are a “profit
centre” (they cost money, but they bring
in money). They are the priority,
but we also need to…
Understand the “Cost
centres”.
Those areas which consume - but don't produce - money. These are the support departments like HR,
IT, Audit, Compliance. Whilst they need
staff to keep things running, this is where we might expect to see heavier
headcount cuts falling. Depending on the
type of business and how it operates, we might see a ratio of 1 “Profit Centre”
staff to 2 “Cost Centre” staff.
One of the problems we see is that, during “good times”,
businesses tend to increase spending, resulting in a higher likelihood of
wastage. Whilst things are good, this is
tolerable. However, people get used to
having certain things as a “right”. When
the crunch comes, they feel unhappy if that “right” is taken away (morale
issue). A clear policy on what makes a
“good” investment goes a long way to minimising this.
Another policy is to make sure that profit margins are preserved and overheads are controlled. In an age where many products and services
are can be copied relatively easily and cheaply, this isn’t easy and means that
any additional expense must be subject to rigorous analysis to determine what
would happen if it had to be curtailed during tough times.
In short, it takes deep knowledge of the business and
competition, coupled with hard decisions and skilful communication.
I have spent more than half my life delivering change in different world markets from the most developed to “emerging” economies. With more than 20 years in international financial services around the world running different operations and lending businesses, I started my own Consultancy to offer solutions for improving performance, productivity and risk management. I work with individuals, small businesses, charities, quoted companies and academic institutions across the world. An international speaker, trainer, author and fund-raiser, I can be contacted by email . My website provides a full picture of my portfolio of services. For strategic questions that you should be asking yourself, follow me at @wkm610.
Labels: Crisis Management, Financial, Leadership, Strategy
posted by William Martin @ 15:10
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