When “Strategic” Cost Reduction is Really Just Whacking…

Cost reduction is easy…Doing it right is hard.  

Any strong, financially based view of productivity must address the cost side of the equation.  So, we are faced with the need to assess, restructure, and consequently reduce costs.

Cost reduction and restructuring exercises are underway at companies around the world at any given point in time.  Just ask the likes of IBM, which recently found itself mired in a bit of bad PR around the scope and magnitude of cost cuts coming in 2015.

Any leader who has been through one of these exercises can tell you how harrowing it can be.

It’s not harrowing because of the topic itself…After all, any Neanderthal can lop costs. Just tell him how much to go get, and he will get it.

It’s harrowing because cost reduction exercises are tough to get right.

Cost reduction exercises start with either a burning desire to improve a strong company, or a burning platform under a struggling one.  But, what separates a true “strategic cost reduction” mindset from our friendly Neanderthal whacking away is a considered approach to performance and risk (notice I didn’t say cost) that centers on effective allocation of burden and costs.

Unfortunately, whacking can become the norm.

Let me tell you why.

The corruption of strategic cost reduction

Usually, a strategic cost reduction exercise begins with a provocative question.  It’s the sort of question that gets any organizational or budget leader into a sincere case of the willies quickly.

“How would you do what you need to do with 40% fewer resources?”

It’s a scary question, but one that is a great stretch exercise for any organization at any time.

Applying a strategic cost mindset, such a question is intended to invoke the necessity of invention that more incremental approaches can never get to.

Just look at the structure of the question:

“How would you do what you need to do…” – This piece of the question implies creativity on the output side.  Are you doing too much?  Are there things better left to others?  Could you justify the first and last outputs that you and your organization are creating? Are you covering your key risks?

“…with 40% fewer resources?” – This piece of the question gets at the input side…In this case, justify the resources in light of the outputs.

Done well, strategic cost exercises that root themselves in the question above result in leaner, more effective organizations with better clarity and stronger culture.

However…

…Executives who use this sort of thought process to reduce costs have a pernicious tendency to fall out of a strategic cost mindset and into a whacking mindset.

They ask their people “How can you reduce costs by 40%?”

What’s the nuance?  It’s in the implied calculus around inputs, outputs, risks, and justification.  In the first (and best) case, the question posed is a creativity inducer.  In the second case, it’s simply an order couched as a question.

That is the realm of legendary whackers like “Chainsaw” Al Dunlap.

Many, many executives and consultants have taken this sort of 40% question–intended as a thought starter and creativity driver–and turned it into a fait accompli.  

So, what’s the right thing to do?

All situations are different. But, the right thing to do is ensure a structured approach to evaluation, action, and strategic alignment.

In one client I served, a transportation provider facing significant financial stresses following 9/11, the strategic cost exercise was about the solvency of the company. Its leadership team faced an existential threat and had to act fast.  But, rather than just issuing an order to “cut costs” by a given percentage (the whacker’s favorite approach), the company’s leadership took a highly structured, thoughtful, but blisteringly fast-paced approach.

In another client situation, this time in packaging, longer term structural changes in the industry led to a need for rethinking the company’s organizational and operating footprint.  The two things went together.  With a measured approach, the company found more than 20% improvement in cost structure through organization and footprint alone.

And, get this, neither of these companies killed morale.

Wait! What?  Neither, you say?  Come on! These exercises are murderous to morale…Right? 

Not really.

And I’ll tell you why:  The ones who get this sort of exercise right start with strategy and mission, and end with a better organization at a lower cost aligned with the strategy and mission.

The ones who get it wrong start with a number, usually a percent or hard dollar number, and end with a number.

The right thing to do is to measure, then cut.  It sounds simple; but it isn’t.  Any time a significant cost reduction effort is undertaken, it is about redesigning the operating model of the company.

Whacking isn’t the way to do such a thing.

One warning:  Depending on point of view, it can be both…

One thing to be very careful about:  Some of these exercises can be strategic and driven very carefully from the top; but because of breaks in communication or agency problems they can at the same time be viewed by the organization as arbitrary whacking.

Senior leadership sees itself as implementing a strategic cost framework.

Senior leadership’s agents–perhaps aggressive middle managers or consultants under pressure to deliver budgetary numbers–resort to the whacking model.

People on the ground see job cuts coming like artillery barrages.  Sure, there’s some rhyme to it (perhaps the stanza repeats every budget cycle), but the reason isn’t there.

All action obtains meaning, regardless of whether meaning is communicated.

A structured, thoughtful, strategically aligned, and well-communicated approach to productivity improvement is the foundation of a modern performance ethic.

I’d be interested in your thoughts and experiences in this area.