Everytime a business, industry or country faces an economic crisis there is a propensity for some decision makers to succumb to knee-jerk reactions. These reactions frequently take the form of substantial “across the board” cuts in everything from expense spending to staff reductions. Little thought is given to what effect the action will have on the business or organization.
Staff Cuts
One of the most common cost reductions that a business undertakes is to cut staff. Often, an edict goes out mandating that there will be staff reductions of 5% or 10% or more, “across the board.” The result:
• Department heads spend hours trying to determine who should be cut. At times, little thought is given as to what skill sets are necessary to continue to make the business successful. To reduce staff in some departments will do nothing to improve the well-being of the business. In some instances, staff reductions may lead to inefficiencies and contribute to greater costs and/or losses.
‚Ä¢ Given the laws in Canada, the termination of employment may lead to substantial severance costs. If some preplanning was in place, it might become apparent that the annual turnover of staff would meet or exceed the level of staff to be “chopped.” Staff leaving on their own volition are generally not entitled to severance pay and, therefore, termination costs could be reduced. One recognizes that it may take a few months before the staff reduction target is achieved, but the overall cost could be less.
‚Ä¢ An “across the board” staff reduction may lead to the loss of the organization’s future. Younger employees with the skill set that will be required in the future are often released since they are the most junior in seniority.
A few years ago, in another recession, many of the major accounting firms and law firms cut their staff and cut out recruiting recently qualified professionals. Subsequently, it took them a number of years to re-balance their organizations all because of a short-term, poorly thought-out response to the economic downturn.
One could argue that the thoughts put forth in this article are theoretically sound, but if the author was faced with declining sales and increasing losses, he would see that there is a need for immediate action and not time for paralysis by analysis. In actuality, the author has been there and done the knee-jerk reaction and lived to learn what a mistake it was.
Alternatives
It is recognized that salaries and wages frequently take up a large part of a business’s costs. However, compensation is made up of a number of components. Prior to terminating employees, it might be sound to fully explore the various parts of the compensation cost:
‚Ä¢ Do the employees appreciate or want all the benefits that they are receiving? If there are benefits employees don’t need or want, cutting them will be a cost-saver and much better than people losing their jobs.
‚Ä¢ It is far better to rid the organization of non-performers, even if they are managers, rather than have “across the board” staff cuts. Managers should be required to rate all their employees and identify the non-performers – those persons should be the first to go.
• Could some of the work, whether in the plant or in the office, be more economically handled outside the organization without damaging the organization either in the present or the future?
• Can jobs be combined?
• Has management taken a pay cut? If they have, make sure that such a move is publicized.
Cutting Costs
During difficult economic times, everyone is working under a lot of stress. Employees will become hyper-critical of management’s activities, particularly if they see their friends and colleagues being terminated while the organization continues to spend indiscriminately. Perception will often become more important than reality. It is important to keep this in mind when making spending decisions like the following:
‚Ä¢ Replacing company cars. A new BMW for a senior executive may be the result of a lease expiring, but perceptually it looks like that person isn’t suffering.
‚Ä¢ Hockey tickets, baseball tickets, etc. are costs that can be eliminated without having a negative effect on the business, but employees note the “belt-tightening.”
• Trade shows are important for the organization to keep abreast of changes in the industry, but does the company have to send everyone that has gone in the past?
• Are entertainment expenses really getting the company business? What message does their existence send to customers as well as employees?
In order to survive these difficult times, we will have to work harder than we have ever worked before. Working hard is identifying what will improve the business both in the short and long-term and then implementing those ideas regardless of how difficult they are to do.
