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Be Careful What You Cut

Cost cutting and job reduction programs have always been popular in downturns, but they have taken on increased prominence during this most recent and extremely severe recession. Beyond the alarming number of jobs lost, what is most distressing for many people is that a significant number of those positions won’t return when conditions improve. Economists suggest that of the 8.4 million American jobs that disappeared during the current recession -a full 25% - will not be returning. In fact, as financial results begin to improve, the cuts keep on coming. As of this writing, about 95% of the companies in the Standard and Poor’s 500-stock index have provided fourth quarter (2009) results, and the majority beat forecasts. Among them was United Parcel Service (UPS), the world’s largest package handler by volume. On the day they projected better than expected earnings, they also announced the elimination of almost 2,000 management and administrative jobs.


Organizations have become addicted to the seductive, and undoubtedly effective (in the short term anyway) strategy of cost cutting, basking in this leaner corporate look borne out of job cuts, capacity reduction, and streamlined production methods. For many the exercise is often described as ‘trimming the fat,’ looking for the low hanging organizational fruit that can be plucked, leading to instant gratification for shareholders through improved bottom line results. I have absolutely nothing against weeding out inefficiency in an organization and constantly striving for better performance. What I do question are some of the areas leaders consider appropriate for trimming.


Just today I read an article quoting a business owner who was forced to make job cuts during the recession in an effort to streamline operations and shield the company from the worst of the downturn’s effects. This person’s strategy when trimming the fat was to permanently eliminate jobs that didn’t generate profits, such as research. And that’s when the hair on the back of my neck stood up.


As leaders – and we’re all leaders of something, whether a company, department, or our own careers – we need to be judicious when it comes to how we’ll create value both in the short and long terms. Cutting something like research, which represents an obvious long wave of value creation is an easy lever to pull and will provide an instant jolt to the bottom line. But what of the medium and long-term when conditions inevitably improve? How do you plan to outwit, outthink, and outperform your competition? You can’t cost cut your way to perpetual success, eventually such a strategy can and will be copied by your competition, driving down margins throughout the industry and forcing every player in the market to drive relentlessly towards that last shred of market share.


Research suggests that 75% of value created by organizations today is intangible in nature; created through such things as innovation, databases of rich customer information, and cultures capable of innovation and change, to name just a few. We all have to manage our bottom lines, it’s imperative, but we must also be cognizant of driving future financial success and that will only be achieved from providing greater value for customers than our competition - value that will be generated through current investments in intangibles such as research, training, and professional development.


Conducting a thorough audit of your operations is always a prudent action , especially in turbulent times, but never forget that you’re in business for the long term and that translates to managing accordingly. Keep in mind that the research position you cut today, or the training program you defer, might have been the one that provided your team with the stunning spark of insight it needed to change your industry forever. Balance in all things is what we should strive towards.


Notes:

  • - "Firms Map Routes to Recovery" by Clare Ansberry, Wall Street Journal (Kindle Edition), March 2, 2010.
  • - "Entrepreneurs Prefer to Keep Staffs Lean" by Sarah E. Heedleman, Wall Street Journal (Kindle Edition), March 2, 2010.
  • - The statistic regarding value creation is drawn from research done by the Brookings Institution