Wednesday 23 November 2016

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.

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