Sunday, May 31, 2009

The Free Guide to Corporate Cost Cutting

All right. I've had enough about this cost-cutting business. I've seen it cycle back and forth through my 20 year IT career, and I'm giving free advice here for anyone that cares. Although it's going to sound like a rant, there might be a couple crumbs of usable information. If anyone finds it valuable, you don't even have to credit me...just do something right in your organization to help your people and we'll call it even.

Reduction in Force

The human resources favorite since the early-1990's. Don't hold your discipline, diet and exercise plan accountable; chop off an arm to lose weight fast. If that doesn't work, try chopping off a leg. Plus, the press loves seeing employees get pounded. Company stock always rises after layoffs.

Although layoffs are generally derided by critics, I'm actually not as down on them as I used to be. Political correctness has changed the employment landscape such that you can't easily fire people for things like you can only fire them for really egregiously wrong things like offending someone's politics or hurting their feelings. And whatever you do, don't release someone that's a minority! Kicking out the elderly is apparently ok.

It's no secret: the companies today use the economy as an excuse to release marginal performers. I'm ok with that, as a part of the evolution of business tactics. In fact, bring on a boom and recession every other year. You need some time to evaluate people and figure out who your sinkers, swimmers, and floaters are. If the organization doesn't have the guts to call it on the sinkers after six to twelve months, then the layoffs are the next window of opportunity. Just be careful to hunt down the truth in the proceedings; you don't want to keep a swimmer that's really just a sloppy hack that's good at politics; analyze the train wrecks they've left behind them.

Sundry Cuts

If I cut pencils out of our budget, I'll save (number of employees X $.35)!

Cutting menial items out of your budget can save money. But it can have effects in other areas. There is a price of doing business. If you are not willing to pay it, don't do business. If you cut in too many ways, you risk looking unprofessional to your clients. Even if that lack of professionalism is superficial, the appearance of impropriety can have effects just as damaging as the actual impropriety. Consider the value of first impressions.

I once had to tell guests that we didn't have coffee cups for a meeting they were attending because of cost cutting. That's damned embarrassing.

I had a friend at another company tell me the company would no longer reimburse airport parking fees. That's damned embarrassing too. Look, cut by asking the employees to find more competitive parking rates, perhaps, but they're traveling for you, so cover the travel costs. Those travel expenses are legitimate 100% business deductions. Can you say the same about expensive bottles of wine at the executive lunches? (If you answered "yes" to that last question, you're a cheating ratbastard! US tax code limits meal and entertainment deductions to 50%, unless given as a documented form of employee reward).

Costs you can cut:

  • Extravagances like vanity, which pay for expensive end tables in the organization's lobbies, golf trips where clients aren't involved, and ridiculous marketing projects like endorsing a sports team that has nothing to do with your business and clients (think EDS and bike racing, or EDS and herding cats, or EDS and stupid logo changes, or EDS and a marketing brochure that actually offended EDS employees).

  • Extravagances like favoritism, through which a cost control measure only applies to the grunts and not to leadership. Of course, that never happens in your company, because you don't just preach "leadership by example," you practice it too...right? Right? Bueller?

  • Extravagances like cronyism, in which large swaths of staffs turn over because one key guy comes in. It's not wrong to bring in fresh blood or known resources, but they should be vetted by more than just the head crony. Sometimes a crony might be an upgrade for a position, but sometimes talented and experienced indigenous staff get carelessly discarded in the process. And typically, cronies don't come for less money than what they made in their previous positions.

Cutting insignificant things saves the organization insignificant money. Go for the things that are costing real money and compromising morale every day.


Engineers, developers, and accountants don't need fancy tools to get things done. They've done without them for years.

People that have been in business for a while know this: payroll is a profit killer. Don't believe me? Ask leaders in any business as small as a restaurant or as big as General Motors. Hence, "reduction in force" being the number one cost-cutting maneuver.

But only an idiot thinks a company can survive without workers. That's why leaders always pay lip service to publicizing people as one of their pillars of strength.

So if you can do nothing else, make the employees you have more efficient. Yes, an automated testing tool will cost money and require time to set up. Yes, computer aided design means having some powerful workstations and some expensive software. But the right tools make your staff more efficient, a cost-cutting act of its own although sometimes difficult to quantify or measure.

But it's not just about making it easier for one person to do a job that used to require several. It's reducing the errors now that cost money to fix later. It's about making people downstream in the process both more efficient and happier because the output passed from the group before them is better.


Let's cut training. It's expensive and our people don't need more skills to do the existing work; they already know how to do that.

The first casualties during a cost-cutting phase always seem to be training and testing. In the same vein as Tools, above, training is a way to keep your workforce current. Automakers don't build cars the same way today that they did two decades ago, and those that do are about to die. You must be competitive to survive, and this means keeping up with advances in engineering, continuous improvement, project management, software, human resources, compliance, law, accounting, and the business of your industry. If you aren't willing to pay the price of doing business, get out.

It's true training costs money. But contrary to what some leaders believe, it's less expensive than churning employees. Churning as I see it is the practice of not training your staff, burning them out, then replacing them with cheap college graduates who have been exposed to new skill sets and methodologies, of course at lower salaries. But turnover as a strategy doesn't take into account the cost of lost experience and relationships within the organization. Training can be a cheaper strategy because it can be measured as a set cost instead of a strategy in which there are superficial gains but dangerous, unexpected, and more difficult to measure intangibles and side effects.

Business Analysis and Testing

We need to get something done and it has to be done by a certain time. Let's set a deadline without doing research first on what's involved.

This point has more to do with business process than cost-cutting, but as I noted above, testing and training are typically given the short shrift on projects even when cost-cutting isn't a focus.

Why does this continue to be a mistake organizations make time and again? Karl Weigers in More about Software Requirements, lists this as the first cosmic truth about requirements:

If you don't get the requirements right, it doesn't matter how well you execute the rest of the project.

Weigers isn't sharing a trade secret here. Anyone that's been through the pain of a project that was subject to poor requirements definition knows this.

I'm not going to bitch any more here about the folly of not giving business analysis its due. But instead, here's another quote from another writer, George Santayana. You don't have to pay it any heed, writers are idiots anyway.

Those who cannot learn from history are doomed to repeat it.

Executive Salary

Says the rabble: Why give so much money to one guy? The company could save a half a million dollars if the CEO didn't have such a high salary.

Despite this blog's rants against misguided management, I have ambivalent thoughts about executive salaries. It's easy to point fingers at the top guy's compensation and say it's a point for cost-cutting. But it isn't always a logical point. For a truly large company whose economies of scale are in the multiple billions of dollars, re-distributing the $500,000 salary of the CEO to the thousands of employees would represent only a small adjustment to them. It's a convenient scapegoat. If it could be reduced, sure, that's a nice gesture that can be taken by those that practice silly things like leadership by example, but it's going to have a limited effect on the final numbers.

A good and sensible leader that has made proven decisions to secure a company's viability (not just ridden the wave during good economic times) , is worth a competitive salary. I think in most cases, this is a part of the cost of doing business (although I would caution executives from getting too heady about this. If you believe you can outsource a software developer to a cheaper but comparably educated one in another country, allow too that you could you swap out an executive for a cheap and perhaps even better educated foreign PhD in business).

A more appropriate subject to cost-cutting is compensation for failed executives. Political correctness once again rears its ugly head here: HR departments are expected to provide some severance for terminated employees. Superficially, this appears to be a policy of humane intentions, to provide some relief to the separated. However, it's probably also the recommended approach in HR circles to prevent lawsuits. The stories of substantial payments to executives that left their companies in worse repair than when they got there are all over the headlines. This is ludicrous. It's not as if those executives weren't paid well when they were running the show. Some of the golden parachutes would have paid the facilities maintenance staff's salaries for years. Why would you pay so much to a person that made messes instead of giving it to the people that clean up messes?

Caveat: let's be careful not to vilify executives that, in contrast to a fair weather CEO, may have made reasonable decisions but had nothing to do with greater economic forces that affected all businesses.

Employee Salaries

Everyone must share in the sacrifices made to maintain the solvency of the company and prevent additional layoffs.

As a survivor of this tactic, I can appreciate its intentions. Everyone takes a pay cut, so there is no appearance of inequity.

But if this is done, do it universally across the organization. When you say everyone, you should mean everyone. If one department takes the hit, how does it affect morale when other divisions don't? And in past years, when the other divisions weren't doing as well and the affected department was sustaining them, did they also get cuts? Despite good intentions, is a nasty precedent being set?

It's also probably better to take an even percentage across the board. The companies I've seen do it use a graduated scale so that higher earners take a larger percentage cut. This is a cost-cut, but some would say it's also taxation without representation. It means, assuming your company is a meritocracy (a huge assumption, I will concede), that the people awarded higher salary increases sustain a proportionally higher sacrifice than those that did not earn the same increases. Suddenly the appearance of equitability has a few cracks in it.

Cost-cutting is Reality

Cost-cutting is a reality of life. It is neither good nor bad, and everyone should be trying to do it all the time, not just in recessions. But some ways of doing things are probably better than others. Good luck.

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