Posted by: knightbird | December 2, 2016

Cost Cutting is Not a Strategy

 

A company I was with for some time considers cutting general and administrative costs to be a strategy. After spending countless cumulative staff hours to develop a budget, the major strategy will be to cut employees and expenses. They want to be cost conscious. Oversight focuses on the budget.

Jack Welch wrote: “The budget is the bane of corporate America. It never should have existed.” He also wrote “… the budgeting process at most companies has to be the most ineffective practice in management. It sucks the energy, time, fun and big dreams out of an organization. (…) And yet (….) companies sink countless hours into writing budgets. What a waste!”

The company’s turnaround strategy as articulated in 2012 was to sell unprofitable existing businesses, buy more profitable businesses and reduce general and administrative expenses. I thought this was a poor strategy, having argued since 2004 for a change to a Lean Management system, achieved with a true cultural change. It was like spitting into the wind—it just came back to bite me.

Management Guru Gary Hamel wrote “A turnaround is transformation tragically delayed.” In 2004, I argued for a change that should have made us profitable if properly implemented. That was in plenty of time to avoid a lot of negative results. I try to follow this millennia old advice:

Act before there is a problem.

Bring order before there is disorder.

Tao Te Ching

Cutting costs is difficult. You have no idea what the relationship of the costs you cut are to the results you want to achieve. If you are, and want to remain the low cost leader, then this is your strategy. But there has to be a method to make a profit in this low cost arena. Southwest Airlines, Dell and Walmart have figured this out. But guess what? The have profitable competitors.

Another organization I knew cut a records management function. Because we don’t measure the impact of lost documents, filing and recovering by higher paid staff, multiple copies and myriad other costs, the lost caused by this cut cannot truly be calculated by ordinary budget means. As a result of cutting costs, you might be sending the organization on a death spiral, especially when you cut operation costs with understanding your customers. CFO’s for example, have no other goal that to achieve the numbers (and get their bonus) for the short term. This is what Jack Welch said about cutting: “Any jerk can have short-term earnings. You squeeze, squeeze, squeeze, and the company sinks five years later.” By then, the marketplace values the managers that did the cost cutting and he/she is gone from the problems they created.

In my Lean career, I have found substantial value within existing budgets. When I talk about value, I am describing the ability to do the same amount of work with substantially less spending. And the quality increases. When I analyze budgets, I am wary of what is promised because I know it’s overpriced (in the absence of a Lean Culture). I have not encountered a single board member in Alaska who understands this. Instead, they order that costs be cut without understanding the impact on their customers.

The state of Alaska is currently undergoing a budget cutting process. The cuts are unrelated to a long term strategy.

Cost cutting is not a strategy in government. You just shift the costs to ordinary citizens. A road not maintained might require a new tire, as happened to me once. Gravel left on a highway has cost me a new windshield on a frequent basis.

In a cost cutting environment, there is no original thinking. Too many vested interests are fighting to retain they already have.

So when your organization is thinking about cutting costs, do some research and see what you will be giving up. Instead of reacting, move ahead of the curve, like Mr. Hamel suggests. Build a culture that is forward seeking, managed through a Lean culture, and regularly breaking from the past to recognize what is available in the future. Don’t be a bureaucrat protecting your turf, Be an innovator that recognizes new opportunity and seeks it out.

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