Eddielogic

– Thoughts on Strategy and Management

The side-effects of over-downsizing – Part two of the story

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Now that we have discussed the strategies of a downsized workforce to cope with the resulting higher workload, it is time to address business leaders and their consultants.

Your company is threatened by falling profits or even losses. Your shareholders, your creditors, all analysts and the whole market expect you to do something. Of course, you have to restore profitability and what quicker way is there than to cut costs? By the way, cost cutting is much easier than developing a new growth strategy, as the large North American car manufacturers demonstrate nicely. There are plenty of consultants who are willing to help you to readjust the headcount of your workforce to the fallen figures for sales and profitability.

Don’t get me wrong. It is often necessary to reduce the number of employees, even if there is not a severe crisis. To my experience it is a common phenomenon, that successful companies tend to increase their workforce more than necessary: add a bit of support staff here and some service people there, more heads of something are allowed to have a personal assistant, marketing could need a few more people for event management and other departments like to have some specialists with a very particular area of expertise. This is all very comfortable for everybody. Nevertheless, it is advisable to cut back such ‘luxury positions’ from time to time.

Unfortunately, companies and consultants tend to overdo necessary and helpful downsizing initiatives.

This is even more the case with external executives who were only hired for the restructuring period. Their success is judged by the level of costs they achieve, which is a short-term measure. It is fairly uncommon (and admittedly more difficult) to measure the success of turnaround experts by the sustainable performance level the company achieves in the long run. Hence, you can observe various methods of cutting costs and reducing headcount. Here are some of my favourites:

  • First there is what I call the lawn-mower method: For all departments and business units the number of people working there is reduced to the same degree, for instance by 10 percent.
  • Another interesting approach is that external advisors, who may or may not know much about the industry and who surely don’t know much about the legacy processes and systems of the company redesign all processes to make them leaner.
  • You could also abandon particular functions at all. For instance, nobody is allowed to have a personal assistant any more. Or you abandon the service person that did the catering for all sorts of meetings and the event management. This sounds very straightforward for a results-driven consultant: you intent to reduce the catering for internal meetings anyway and the only events the company plans to organize are marketing related. Hence, the sales people could do that by themselves.

I am sure that there are even more of these very straightforward cost cutting measures. What they have in common is that they almost inevitably will have some side effects:

  • Chances are good that the new processes won’t work as planned at the drawing board. Hence, as soon as the restructuring team walks out of the door, the people left behind will start to redesign the redesigned processes.
  • In some cases, departments simply will not be able to perform their tasks with the reduced number of people, no matter how hard they try. After some time they will claim their need for more staff.
  • Since the people for service and assistance were made redundant, highly paid specialists have no choice but to spend their time at the photocopier and the binding machine.
  • Clever departments were able to avoid such situations. They had created new positions to which they transferred their assistants. Suddenly they needed a researcher, a data analyst or something like that.
  • Besides that, there will be the negative effects on the motivation of those who did not lose their jobs – as described in part one of our story.

If we take all this together, it becomes very obvious that a reduction in headcount and in personnel costs respectively in only what you see on the surface. In addition to that there probably are hidden costs and negative effects on performance levels. Hence, the objective of any downsizing initiative should always be to achieve a reasonable and sustainable level of cost and performance, not the reduce costs as much as (theoretically) possible.

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