The Fewer Fallacy: Why We Have Gotten Carried Away With Cost-Cutting
Date: March 29th, 2012
It just makes sense. The fewer people you have, the lower your costs. The lower your costs, the more money you make. Right? So, cut research, cut leadership training, lay off a few thousand people. Wait, not so fast! The formula used by many companies to reassure their stockholders that they are cost conscious and willing to make the “tough choices” may not be as obvious as you would think. Huge consulting companies have justified their huge fees by pointing to the evident improvement on the bottom line. “See,” they say, “Now you are paying half what you were paying for labor. Here’s my bill.”
The real outcomes, however, may not be so clear. Especially, over the long term! What looks like a great deal right now may result in some painful realities as the company has to conduct business with an understaffed, under trained, embittered workforce.
Some companies are starting to buck the trend. “Over the past decade, the Japanese fashion chain Uniqlo has become among the most successful retailers in the world. … And there’s something else that makes Uniqlo distinctive: it hires a lot of people, and spends a lot of time training them. When the company opened its flagship Fifth Avenue store, last fall, it hired six hundred and fifty people, and pledged to have four hundred people working there at any one time.”
This is, of course, going in the exact opposite direction from most retailers. When was the last time you went to the mall and walked away saying, “Wow! What great service. It was a pleasure shopping here”?
It is more likely that your inner dialogue went something like this. “Where do they find these people? Didn’t their parents teach them anything? I should have stayed home and shopped on line.” Of course, you don’t have to pay young, untrained employees as much. It costs money to train them. Why should I pay all that money to hire experienced people? Why spend so much on training? Doesn’t all of that add up to a drain on the bottom line?
According to Zeynep Ton, an M.I.T. professor, “I have studied retail operations for more than 10 years and have found that the presumed trade-off between investment in employees and low prices can be broken. Highly successful retail chains—such as QuikTrip convenience stores, Mercadona and Trader Joe’s supermarkets, and Costco wholesale clubs—not only invest heavily in store employees but also have the lowest prices in their industries, solid financial performance, and better customer service than their competitors.”
One of the problems for leaders is that the impact of cost cutting is immediate and easy to document. The longer term impacts are less visible. Some leaders even count on this. They cut staff, cut training, pat themselves on the back for the reduced costs then move on to ever higher paying positions of even greater responsibility. And many of them continue to make the same mistakes, but on a larger scale.
It is, of course, one of the leader’s responsibilities to see that the company’s resources are used properly. Eliminating or reducing waste is a good thing. “But there’s a strong case to be made that corporate America’s fetish for cost-cutting has gone too far. Some of the highest-profile retailers to flop in recent years were companies that made a big deal of slashing payroll costs. In 2007, Circuit City fired more than three thousand of its most experienced salesmen, replacing them with newer workers whom it could pay less. Its sales dropped, and it was bankrupt within a couple of years. When Bob Nardelli took over Home Depot, in 2000, he reduced the number of salespeople on the floor and turned many full-time jobs into part-time ones. In the process, he turned Home Depot stores into cavernous wastelands, with customers wandering around dejectedly trying to find an aproned employee, only to discover that he had no useful advice to offer. The company’s customer-service ratings plummeted, and its sales growth stalled.” In Phoenix (my home), it is almost impossible today to find a Home Depot, much less a Circuit City. If I could find one, I wouldn’t shop there.
So what is the answer? If stockholders are demanding immediate results how do you proceed with a long-term plan? Part of the answer lies in communicating with all of your stake-holders (not just the share-holders). Look at the research and look at the results of companies that have been successful for many years not just the ones who performed well last quarter. Remember “benchmarking?” Well, just maybe you should use the long-term winners as your benchmark companies.
Most companies have done some work on their long-term vision and mission. Perhaps it would be a good time to take a look at your company’s vision statement and decide if it is real or if it was just window dressing. Few vision statements say, “Our company will do really, really well for a quarter or two then go bankrupt.” Most of them talk about what the company wants to accomplish for many years to come.
Typically, they include statements about quality, service, teamwork, diversity, and competitiveness. They mention high performance, corporate responsibility, making a better world, making creative products, etc., etc. At one time, the leaders of your company were thinking about the big picture. They had their eyes on something other than next quarter’s financial statement. They had dreams.
It might also be time to take another look at the people who currently work at your company. Are they engaged? Do they know what is in your vision statement? Are they committed to great customer service? Are they constantly looking for ways to improve your process or product? If not, maybe it is time to do a little training. Start listening to what’s going on in the workplace. Start trying to create the kind of culture that will actually allow you to achieve those things that you hoped for in your vision statement.
While it is not the only answer, leadership training might be put higher on your agenda. Those in leadership positions are the one’s who set the tone for the rest of the workforce. If they are committed to excellence, others are more likely to follow. In your leadership training, teach them how to lead in the way that is most compatible with the culture you are trying to create for your organization.
So if you want to cut costs, take a look at the salaries of those managers who insist on “leading” through power and intimidation. Take a look at your succession planning. How do you hire and promote? Are you seriously taking into account their commitment to long-term goals or have you allowed yourself to be blinded by flashy, immediate results?
People are motivated to become leaders for many reasons. Certainly making more money is one reason. But most, I believe, also have ambitions about making a difference, creating something lasting, achieving something worthwhile. Don’t let those things fade just because you are feeling pressured to “adjust” the next quarter’s balance sheet.
© 2012 William Stinnett, Ph.D., L.E.T. Master Trainer for Gordon Training International
Be a part of the conversation!
Share your comments on:
Or if you would like to contact us about this posting, please email or call us at:
800-628-1197 ext. 308