Have E-Business Cost Cuts Gone Too Far?

Companies have been cutting costs -- and workers -- left, right and sideways during the economic downturn. The downsizing is understandable, but some companies may have gone too far, cutting so close to the bone that they will find it difficult to ramp back up when times get better.

"We're learning that companies were very quick to cut costs -- almost too quick," GartnerG2 analyst Jorge Lopez told the E-Commerce Times.

According to Forrester Research analyst Tom Pohlmann, companies that cut budgets and technology plans too enthusiastically in 2001 may be caught flat-footed when an economic recovery kicks in.

Efficiency Is Essential

Carol Rozwell, vice president and research director at GartnerG2, said companies have made several cost-cutting mistakes, the first of which was cutting e-business budgets.

"The issue that they've been missing is that the real business benefit comes from process improvement -- making your company more efficient and even eliminating unnecessary processes. The companies that looked for the quick fix and cut e-business are the ones that are putting themselves at risk," Rozwell told the E-Commerce Times.

Companies that decided to save money by backing off from e-business initiatives aimed at customer convenience will lose out to companies that stayed the course, Rozwell said. "Astute business leaders know that the time to innovate and create new relationships with customers is now, not next year or in six months when the economy gets better."

The Trouble with Layoffs

Another cost-cutting mistake has to do with layoffs. According to Challenger, Gray & Christmas, 146,461 Internet workers have been laid off since December 1999. While many of those job cuts were unavoidable because entire companies went out of business, others could -- and should -- have been avoided.

"We do find that, historically, layoffs are not a permanent benefit to the company. It's a temporary fix," Rozwell said. Specifically, companies tend to mandate layoffs across the board rather than cutting back less-successful divisions and adding staff to those expected to show future business growth.

"That is absolutely foolish. Many companies will have to rehire the people they've laid off, because they were not focusing about where the company was going, but instead based layoffs on where the company had been," Rozwell said.

Lopez said he agrees that companies should be careful where they cut jobs.

"If you feel you have to cut costs, make sure you know which people are going to be important to your future. You want to be sure you don't lose the people who can take you forward," he noted.

Layoffs at higher levels also may cause problems in the future. Marketing and human resource groups at many tech firms were hit especially hard by layoffs, and that "could stymie turnaround efforts," Pohlmann said.

Some companies have reduced staff by centralizing IT management, but that creates "a battleship that can't change course during an economic recovery, delaying products as a result," he added.

Low Morale

Even companies that attempted to avoid layoffs by making other cuts may have hurt their chances for future success . In the wake of layoffs of friends and colleagues, as well as a general tightening of the purse strings, the morale of many tech employees has plummeted, and that is bad news for their employers.

"The impact to the customer is very severe when [employees] are not motivated to do their job enthusiastically," Rozwell said. In particular, morale is hurt when companies institute expense controls that hurt the quality of life at the workplace, especially when only low- and mid-level employees are affected.

"The demoralizing part of cost cuts is they appear to be unevenly distributed. Companies are asking the rank-and-file employee to do things they would never ask a senior manager to do," Rozwell said.