Cutting Costs Without Killing the Company

It is a common business scenario: A new CEO takes over a struggling company and vows to put it on more solid financial footing. He assures investors that he will cut only the fat from the ailing organization, leaving the muscle and bone the company will need to survive and thrive intact.

But when it comes time to put the scalpel — or the hatchet, as the case may be — to work, is it possible to know how much to cut? No two instances are alike, but with careful, even, precise cutting, executives can keep their most talented employees on board, avoid fatal blows to morale and slowly but surely write a turnaround success story.

There is no shortage of would-be comeback kids, including some of the biggest names in technology. Lucent, which sold US$5 billion worth of assets and slashed thousands of jobs, Motorola and Nortel, for instance, all have vowed to implement cost reductions.

Pink Slips and Slip-Ups

To cut costs enough to right a badly leaking ship, most companies must look for savings in every corner of their business operations. But in reality, some areas often are left untouched. Executive pay, for instance, is rarely targeted in initial cost-cutting measures. Experts say top-level managers are too important to a turnaround effort to risk losing them.

Still, in almost any company, employees represent the biggest budget line item. But they also are usually the most important asset. The balancing act between cutting costs and keeping employees happy is one that every CEO strives to get right.

Should a company cut the last people hired, or should it lay off more senior workers, a move that offers more immediate savings but has the downside of flushing more intellectual capital? Should it cut equally across all departments and management levels to promote the appearance of fairness?

“Doing the layoffs is often only half the battle,” John A. Challenger, CEO of outplacement firm Challenger, Gray & Christmas, told the E-Commerce Times. “What a company says during those times can be equally important.”

Damage Report

Layoffs, especially large-scale ones, can leave a workforce reeling. Motorola grew to 150,000 employees at its peak, then announced a plan to scale back to 100,000 over a period of time.

However, Challenger noted, “Companies have to be careful about projecting too far into the future. Doing that will cause the very people you want to keep to leave.”

Ironically, he said, the rash of layoffs in recent years probably has made it easier for executives to cut workers. Even if mistakes are made, the difficult job market means collateral damage should be minimal.

The Next Big Thing – Can Wait?

While it is dangerous to prune research and development budgets so much that a company risks falling behind its competitors, many have been forced to reduce their spending on new technologies. Lucent, for example, whose Bell Labs has made important telecom advances, cut $1 billion from its R&D budget in 2002.

“Shareholders and analysts are clamoring for results right now,” Meta Group analyst David Willis told the E-Commerce Times. He noted that Lucent has a reputation for constantly refining its technology. So, for Lucent and other companies that built reputations on being one step ahead of the competition, slashing research may be the worst thing to do.

“Each company has to figure out what it can give up,” he noted. “When a company pledges to turn itself around and sets a time frame, it has to take dramatic action. The hope is that the market will pick up again before any bad moves really start to hurt.”

Stay Away from the Core

Morningstar analyst David Kathman seemed to agree. “The case study approach is to find your business’ core and work outwards from there,” he told the E-Commerce Times. “Those things farthest from your core, that aren’t directly supporting it, that’s where you start.”

For some companies, non-essential assets might include highly paid worldwide salespeople, whose salaries and expense accounts can be replaced by geographically diverse resellers or through partnerships. For others, outsourcing information technology may be an option, unless the IT department is a key driver of business success. Many firms have shed high-priced leases in favor of less-glitzy digs, while others have moved to lower-rent ZIP codes to save a few million dollars.

Following the Crowd

But while cost-cutting decisions must be made on a company-by-company basis, no decision is made in a vacuum. In fact, companies like Lucent and Motorola have plenty of examples to learn from in the battered technology and telecom landscapes.

“The ideal is for a company to be able to keep innovating and growing through a downturn,” Kathman said. “But in an environment like this, when every investment is expected to have a short-term return, things like research become harder to justify. Knowing how close to the bone to cut is very hard because the answer could change in a day or a week.”

For now, executives must work with the information they have at hand — and hope it is enough to steer them through the rocky seas ahead.

1 Comment

  • So this story provides guidance how? It says "You have to cut, but be careful where you cut. And hope if you cut wrongly, you’ll have time to recover." **shrug** So what?
    There are a dozen issues or more staring menacingly out at anyone approaching this quagmire.
    Like what’s managements’ perspective on the future of the company 25 years from now? How will they respond to upstarts and newcomers who don’t have sunk cost issues and can eclipse the company’s product and delivery technology in performance and undercut it in cost?
    Like why is it that students from eastern Europe and India are winning the ACM International Collegiate Programming Contest when the ability to win that has nothing at all to do with the wages-per-hour programmers in those countries are paid? Could it perhaps be that AMERICAN corporations have cut costs "not at the core of business", as the article suggests, INCLUDING sponsorship of scholarships and basic, non-mission-oriented research at American universities? Research support from corporations AND government at LEADING U.S. universities (MIT, CalTech, etc) is less than HALF of what it has historically been.
    Like the rationale for using selective cuts in labor force to improve business productivity is heavily dependent upon the definition and view of WHAT PRODUCTIVITY IS. (See http://www.economist.com/displaystory.cfm?story_id=1595523 for an example of this.) Could a slight change in definition of productivity mean the optimal policy for making companies "lean and mean" changes drastically? If such policy and practice is actually that unstable across reasonable variation in its ground, is it sensible?
    Like cutting labor and expenses "to the bone" assumes that cash is the sole or primary medium of value. While it is tempting to embrace this opinion in a deflationary environment, it isn’t true even in a deflating economy. Keynes and others identified "animal spirits" (see http://www.economist.com/research/Economics/alphabetic.cfm?LETTER=A#ANIMAL%20SPIRITS) as an important factor in economic success. Moreover, if corporations and government cut cash or investment now to improve their "bottom line", whether that be in the form of dividends to short-term-minded shareholders or citizens seeking tax cuts, and while doing so shortchange their contribution to non-cash forms of value, whether that be innovation or education or simply supporting the economic mechanism that rewards hard work, why, measured according to these non-cash metrics, are corporations and government any different than consumers who run up large credit debts measured in cash?
    To leap over the chasm filled with these issues, as newsfactor.com does, suggests it is sucking up to its advertisers, for fear of annoying them.

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