The cost of cost reduction

Door Patrick Verheij

A healthy company needs a healthy cash flow. So any business owner prefers to spend her cash mostly on creating valuable new products and other things that matter much to keep the company in good shape. Nothing new here.\r\n\r\nAlas, quite a few companies aren’t so lucky to be in the position to do so. Especially the larger ones. Companies that have grown and accumulated rather complex organizational structures, IT landscapes, processes and…debt in any or all of these.\r\n\r\nThese companies often need to spend huge sums of money on keeping their products and services in the air without having much room for innovation…and better worker salaries…and training budget…and even improving the situation they are in. Such companies are in bad shape due to the fact that they have built a costly lifestyle for themselves. And they know it.\r\n\r\nWhether or not this this bad shape is caused by some form of reckless leadership, the company has to deal with it or die. And that’s where the dreaded practice of “cost reduction” comes in.\r\n\r\nNow there’s nothing wrong with cost reduction in itself. Any business owner wants to reduce cost. But it needs to be done consciously, without sacrificing too much value creation (if any).\r\n

Cost reduction needs to be done with a mindset focused on value and value creation.

\r\nA bright leader asks herself the question: “if I cut this cost, what would it do to the value we are creating anywhere in the company?”\r\n\r\nReckless leadership that ignores value and value creation is the last thing a company needs. Blind focus on cutting costs will often do more damage than good.\r\n\r\nLet’s see what can happen when some costs get cut recklessly.\r\n\r\nLaying people off\r\n\r\nPeople’s salaries are direct costs. That means that you immediately save money when you stop paying them. It’s an easy way to reduce cost, either by selecting the lowest performers for a career under welfare or by just selling or deleting part of the company.\r\n\r\nI have once been employed by a company where the number of employees followed the slope of an imperfect sine wave. In good times, many people are hired. In bad times, they are easily laid off again. Every couple of years, middle management received the “dump 10% of your people” command, resulting in random layoffs. And it probably still goes on like that.\r\n\r\nSuch companies rarely lead the market in terms of employee satisfaction let alone employee leadership.\r\n\r\nLayoffs, especially the random ones and the meagerly explained ones, result in distrust and mediocrity among employees. I have witnessed hordes of people acting stunned and unproductive during the many months that it often takes for management to break through the rumors, get the message out and get it over with. A lot of value is lost and people feel a lot less valuable, regardless of the outcome for them. That’s the cost of reckless layoffs.\r\n\r\nIn The Netherlands we are already getting so used to layoffs that we have standardized the way we address people who are about to be laid off: “boventallig” or “preventief mobiel”.\r\n\r\nPersonally I don’t think layoffs can or even should be avoided. Companies aren’t families where people stick together for better or worse. Sometimes a company has to let go of people, for whatever the reasons. Just don’t do it too often and always make clear what the rules are. And if there’s a calamity, then communicate openly and honestly. People will then keep their faith, quite often even the ones that leave. Value retained.\r\n\r\nReplacing people with cheaper labor\r\n\r\nOffshoring is still a trend, and for a good reason. Bulgaria, Romania, India, China, and quite a few other countries are full of extremely bright people with…the fortune of living in a country where their meals are a lot cheaper. Let’s just say it like that.\r\n\r\nBut…quickly replacing your trusty and knowledgeable devs with even the brightest of stars from the East is a recipe for trouble.\r\n\r\nRecently I witnessed quite a few teams losing more than half of their members, seeing them replaced with ambitious people from a company that could offer their services cheaper. These teams are in trouble now for they lost most of their productivity, most of their team cohesion, most of their knowledge of the products they work on and most of the risk mitigation abilities they once had. How’s that for a cost of cost reduction?\r\n\r\nWhen replacing members from a team, you should be aware of a few things including the time it takes to learn about the existing culture, the company, the business, the product, the technicalities, the way of working and the like. Some of the teams mentioned above reported a learning curve of about 3 months to get an experienced dev up to speed on the product…with existing team members aiding them. The offshore people tried to do it in under a month. Without too much help, because the people they replaced were already gone.\r\n\r\nTo retain most value and value creation, let teams control the replacement of their members. Of course within certain constraints, but more importantly: with a strong company vision behind the necessity of the change and some human kindness.\r\n\r\nCutting budget for training and personal development\r\n\r\nWe live in an era where everything goes increasingly faster. Staying on the same job for 30 years or more is a thing of the past. As Seth Godin says:\r\n

“You are not entitled to the business you want”

\r\nThis also counts for specialists: you cannot “claim” a job just because you studied something or have years of experience in that specialism. Stuff gets automated, you know? Things change.\r\n\r\nThat means that any company should heavily invest in keeping their people in shape to be the best for the company. Otherwise they automatically revert to the layoff sine wave mentioned earlier in this article.\r\n

Sponsoring people’s professional development is mandatory for companies in the 21st century

\r\nI once worked for a training company that forbade their trainers to spend the company’s money on…training! They deprived their employees of experiencing the very thing they were selling! Can you even imagine how I felt? I lost connection to that company faster than a newly elected US president loses his promises.\r\n\r\nA company should challenge its people to keep learning. That’s the ultimate test of company leadership: develop your people beyond imagination and see if your leadership is strong enough to keep them in and possibly surpass you!\r\n\r\nBe aware of value and value creation\r\n\r\nThe three examples above are just a few examples of cost involved with cost reduction. You can probably add lots more examples to this list and accompany each with good advice on how to do a better cost reduction job.\r\n\r\nDon’t let the cost of cost reduction cripple your company. Think with value and value creation in mind when touching cost. Now just find out how to do that properly 🙂

Patrick Verheij

06 59 443 447

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