When there is an economic recession, corporations often react by retrenching staff. This is done because of the common sense that says that:
* we must remain profitable ALL the time.
* when times are bad (because growth is negative) we must cut the costs in order to remain profitable
* a big portion of the running costs of a business are the people
* therefore cutting the people will make the business profitable again.
Brilliant logic? Perhaps.
In Part 1 we discussed - Is it reasonable to grow all the time? How do some do it? Why do others (most) fail?
Welcome to Part 2 - What do companies do to injure themselves further when growth slows? When is cutting costs bad?
1. Let's first clearly define the how management is often measured primarily. Financials. Firstly, that means 2 things, the top line (revenue) and the bottom line (profit). And profit is a result of revenues minus costs. Nothing you can do that can directly affect profit. You can only act on Revenues or Costs. Ok. Cleared. Secondly, if we cannot grow profits, we must at least grow revenues, or vice versa. Directors may accept stagnant profits with growing revenues, and may also accept growing profits with stagnant revenues. Directors will jump if you have decreasing revenues and decreasing profits (which seems to be a logical cause-and-effect, but it is not acceptable by the directors). So managers must now grow both if possible, or at least either profits or revenues.
2. Now another factor comes into play, when times are good, the sales team calls all shots, because revenue generators are king. Because if you can have 30% growth in revenues, many, many other things can be ignored. But when times are bad, sales (both the numbers and the team) are down and everyone looks at the other factor. When revenue growth is slow (or negative), managers want to maintain profit growth and the other factor that affects profit is now under the microscope - Costs.
So when growth (sales or profits) slows, we look at cutting costs to remain profitable. It seems so logical. If sales is growing less, the profits growth will drop. Therefore, to maintain profits growth, we must reduce costs because Revenues minus Costs = Profits. Yes and No. Depends. Let's proceed and see how we typically cut costs.
3. What are the expenses that we can cut? There are expenses directly related to production (raw materials, electricity, machine maintenance, production workers, etc), indirectly related to production (personnel from purchasing, warehouse, delivery, billing, etc) and overheads (rental, office personnel, management, executive benefits such as cars, directors fees, etc). To make costs cutting effective, why is it that corporations do not cut the same percentage from each of the 3 groups? Change the grouping as you see fit, but doesn't it make sense to cut fairly across? Doesnt matter whether it is in terms of percentage, absolute dollars and/or headcount, just cut across in equal terms. But no. We don't. We almost always start with production.
4. Why do we normally start with production workers? Cutting costs, of course, has a direct impact on the profits immediately. Often the production workers are the first being cut. Why? Well, if we are going to produce less (because of reduced demand), then we need less production workers. So cut them first. Question is, are we cutting in the right places? This is perhaps a very important question that is unfortunately answered by the office people, the managers and the accountants. And guess who are the ones seldom affected by a reduction in personnel. These people who are deciding where to cut, will NEVER (at least I have never heard of it) propose to cut their own jobs, cut jobs that will threaten their own, or cut jobs which after cutting will make theirs more difficult. Wonder why? Now we should also look at the personnel expenses of managment, office workers, production workers are see how the money is distributed (40:30:30 respectively perhaps?). Perhaps we could save more by cutting off some of the management?
5. Let's talk a logical walk. If we are not growing (which means we are merely producing what we were producing and therefore have already proven the capability to produce and deliver), or if we are, in fact, shrinking, then we have extra capacity (which means we can be a bit less efficient and less effective), then we dont really need most of the managers involved in "development" related work and half of all managers in other areas. Supervisors are sufficient. No need for most managers. But they are not cut?
6. When production people are cut, we lower production ability. We also reduced some expenses and yet kept many other expenses running at the same rate. How much does a manufacturing company save when production workers are cut? All other expense remain the same - rental, management, drivers, installment on machines, vehicles, other assets, aircon, phone-lines, etc. You get the idea. If we look at the costs factors of a manufacturer, it may look something like this, top mgmt 10%, mgmt 10%, office workers 10%, property, property mgmt and utilities 10%, machines 10%, sales, warehouse and transport 10%, raw materials 20%, supervisors 10% and production workers 10%. If production workers salaries represent 10% of a manufacturer's costs, they would have cut a total of 5% of the costs if they cut 50% of the production workers. But when 50% of the production workers are cut, half the machines cannot be used, half the supervisors have no one to supervise, half the sales people have nothing to sell, and half the delivery team is free, etc. Yet, we cut the production workers first. What if we cut half of management first? Ability to sell, produce and deliver remains the same.
Before you jump at me for proposing and supporting a cut to managers and workers, let me clearly state that I am against retrenchment. And it can be done if only managers were managing better and measured more effectively than the current practice.
7. Now that we know what not to do, what should the company do then? Pay the staff even when there is no work? The answer - Yes. So that they can experiment, learn and innovate. This is the time for training, for quality circles, for whatever new-management-fad to be tested. Did we mentioned that the only way for a company to continuously grow is by being innovative (See Part 1)? How can we be innovative when everyone is busy doing operations work? Implement a 4 day work week, offer the 1 of the working days for innovation experiments. Reward those that bring about improvements, and let the others continue doing their previous jobs. When the economy recovers, this improved team is better than your competitor (who retrenched his workers and is now busy hiring his ex-workers).You have not only an improved team that can outperform others, but a team that has higher morale, remembers that they were given a chance, and with loyalty to you who took care of them through bad times.
If we accept that innovation is a must for sustainable growth, and if we accept that a recession may be a good time to test out innovative ideas, isn't a great time now?
If this is so obvious, why are we not doing it? Why is it that some companies have a reputation for being innovative and not in others?
In Part 3, we attempt to look at this question.
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