This short essay is a Conversation Starter, one in a series of invited opinions on topical issues. Read what the authors have to say, then let us know what you think.
According to a recent McKinsey Quarterly survey, 79 percent of all companies have cut costs in response to the global economic crisis—but only 53 percent of executives think that doing so has helped their companies weather it. Yet organizations continue to cut. Cost reductions often go wrong, we believe, and our experience suggests that they can be done in a better way.
In the heat of a financial crisis, companies must focus on their financial viability, but they tend to cut about equally everywhere—without considering their strategic needs—because that seems more straightforward, and in some senses more fair, to all executives concerned. A second problem, with longer-term consequences, is that quick head count reductions often come at a price: missing the opportunities that crises can create to improve business systems or to strengthen parts of an organization selectively.
Here’s an example of how things can go wrong. An international energy company that needed to save money fast started by simply defining the amount of savings it needed and then required each department to cut costs by a similar amount, primarily through head count reductions, which varied from 17 to 22 percent. The reality, however, was that the company needed to invest more in certain technological areas that were changing quickly, as well as in operations, where performance was far below industry benchmarks. What’s more, the HR and IT departments substantially duplicated certain activities because different layers in the organization were doing similar things. Much deeper cuts could therefore be made in these functions, with little strategic risk. But the company cut costs across the board, and just six months later, technology and operations were lobbying hard to bring in new staff to take on an “uncontrollable workload,” while substantial duplication remained in HR and IT.