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Post 5 in the series: Managing in a Downturn

In a recession, it is easy to give excessive focus to cost-cutting. And you do you do need to conserve cash, so I’m not saying that cost-cutting has no place. But I am always skeptical of obsessive cost-cutting, especially when this becomes the norm.

There are two problems with a default tendency to excessive cost-cutting when things get tough.

First, it often amounts to retreating. There are few better ways to retreat than to cut organizational capacity through down-sizing, closings, and extensive budget cuts. Sometimes these things may be necessary for sure, but if they are necessary do them with the aim of pruning, not retreating. The difference is that pruning is done strategically to make the organization stronger and enable new growth. And have as light of a touch as possible.

Second, an obsession for cost-cutting often fails to get at the real issues. It is often a one-shot reduction that does not improve the capacity of the organization for renewed growth but rather simply masks the poor management practices that are the real problem.

Here’s what Ram Charan has to say in Profitable Growth Is Everyone’s Business: 10 Tools You Can Use Monday Morning:

In contrast [to improving productivity], sporadic, deep cost-cutting — downsizing, closing plants, across-the-board budget cuts — are one-shot reductions (often without attention to the consequences for revenue growth) that do not result in doing things a better way [emphasis added].

Cost-reduction campaigns are largely a result of the lack of discipline of productivity improvement on a long-term consistent basis. When employees experience these cost-reduction campaigns every year and sometimes two or three times a year and revenues are flat or declining, they know they are in a business going nowhere.

That is spot on and fantastically well said.

Third, an obsession for cost-cutting often reduces revenue growth down the road. Deep cuts are often made without regard to the consequences they may have for revenue generation. For example, a store might decrease staffing in order to cut costs. But as a result of the decreased staffing, customers can’t get their questions answered or find what they want as easily, so both sales growth and buzz about the store decline. Money was “saved,” but at an even greater cost.

Another variation of this is the sacrifice of the long-term for the short-term. Tom Peters had a good word on this a few months ago:

I see far too many of my clients, good people with good motives, obsessing on pleasing Wall Street analysts, and taking actions that may well reduce their stock’s value two to three years out. They have slashed budgets on many longer-term strategies, such as research and development, talent retention and development, even preventive maintenance on their equipment. All of it in the name of improving margins and a short-term increase in share value (or so the analysts say).

Fourth, an obsessive focus on cost-cutting can stifle your people, which ultimately undercuts your company right at its energy source. Do not pursue cost-cutting in a way that overlooks your people. Continue to focus on and build the strengths of your people. As a helpful Gallup article points out, a strengths-based approach to management is more important than ever during a recession.

In sum, when cutting costs is necessary, don’t get tunnel vision. Continue to keep productivity improvement and revenue growth on the radar, continue managing to the strengths of your people, and don’t prize operational efficiency over continuing to treat your employees like people who are the true engine that will propel your company through the recession and beyond.

For more on specific ways to achieve profitable growth which can be implemented immediately, I would recommend Ram Charan’s book Profitable Growth Is Everyone’s Business: 10 Tools You Can Use Monday Morning — whether you are in a recession or not.

Ram Charan also has a book specifically on managing in recessions, called Leadership in the Era of Economic Uncertainty: Managing in a Downturn. I haven’t read much of it yet, but everything that I have read by Charan has been very solid.

One of the major points Charan makes in the book is the importance of putting cash efficiency front and central during the most severe points of the recession. Since “you must have sufficient cash or credible access to it to weather the storm,” this means not taking actions during a severe recession that will “consume disproportionate amounts of cash in the form of more inventory, extended duration of accounts receivable, or increased complexity.”

So do not retreat, do not turn to one-shot cost reductions to mask the real issue of a lack of discipline, and do not sacrifice the future, but do give a higher place to cash efficiency during a recession than during non-recessionary times.

Posts in This Series

1. Managing in a Downturn: An Introduction
2. Managing in a Downturn: The Good News
3. Managing in a Downturn: Don’t Retreat
4. Managing in a Downturn: Don’t Overreact
5. Managing in a Downturn: Be Careful of Cost-Cutting Campaigns
6. Managing in a Downturn: Keep Making Meaning
7. Managing in a Downturn: It’s Time to Hire