In a recession, executives have to decide who pays. A prior post discussed the different people who can pay in a recession. Customers can get lower service. Employees can be laid off. Suppliers can be pressured. Investors can be made to accept reduced financial performance. The executive decision in a recession rests in who pays and how.
Mindless management – responding to recession by reaction without thought
Executives face difficult decisions when cutting back costs in the face of a recession. Too often, the decision is simplified by ‘across the board’ actions. Reducing costs by 5, 10 or 20% for everyone is mindless. It assumes that all resources are equal. It presumes that inefficiencies evenly distributed. It communicates that any pain much be shared by all.
Across the board actions signal to everyone in the company and in the market that leaders do not understand their business. They do not care how it works. They are under informed on how it creates value. This is a definition of mindless management.
Finance people counter that top down cost savings goals makes managers responsible for determining how to reduce costs. To me that seems like finance passing the buck. In the face of department cuts, managers shift costs between groups and processes. See I reduced my costs. Or they, simply ‘do more with less’ keeping and exacerbating operational inefficiencies.
ng about ‘who pays’ as part of the recession response reflects a different approach. It requires real understanding to figure out where and how to reduce costs. It extends these decisions beyond simple financial management by bringing the business to life.
Creative cost cutting is impossible ‘across the board’
ar counts the same, but not all dollars are equal. Customers, employees, suppliers and investors are likewise not equal. Cutting across the board, or even cutting proportionally – bigger budgets take bigger cuts reduces an enterprise to its financial figures. The problem is financials are reward looking. They tell you what happened. The behaviors and impacts on customers, employees, suppliers and investors are leading indicators. They will establish what can happen in the future. More on that in the next post on payback.
There is little creativity in financially oriented cost cutting. See an expense, it is too high, cut it down. The result hollows out operations, customer and brand value rather than building a business to bounce forward in a recovery. It is the corporate equivalent of medieval medicine’s bloodletting technique – see Theodoric of York.
Understanding who pays opens the door to creative approaches. It encourages managers and team members to find ways to reduce the cost of something while still maintaining its value. Take customer service for example. Reducing service hours, resources or running on inadequate technologies saves money, by making the customer pay.
If you do not want customers to pay for the recession, then you need a different approach. Engaging customers, managers and associates in the search for that different approach accelerates creativity. Finding those new ways reduces costs and maintains competitiveness for the future.
Similar logic apples to the other audiences.
- Employees pay literally with their jobs, wages and benefits. Innovative programs like furloughs, reduced hours and others provides alternatives. Mindless management forgets that the total cost of layoffs or ‘workforce reductions’ is often much greater than they budget for. Not to mention the impact on skills, good people move first. Nor considering the impact on the workforce, its engagement or willingness to change.
- Suppliers are made to pay by reducing purchases, inventory levels, delaying projects etc. However, many of these costs are contractually locked in making them difficult to easily change. Finding approaches to share costs, reduce mutual working capital requirements, fulfillment sizes and restructure supplier arrangements are possible.
- Investors pay as well, particularly from mindless management. In those circumstances, the recession costs investors in the form of corporate losses. Overall market declines hit short term share price. Investors pay long term as well. Future value stagnates when across the board cuts reduce current costs but also the capability and capacity need to capture growth in a future recovery.
Getting beyond mindless management
Executives adopt mindless management practices as simple answers to complex questions. In the face of the need to act, they act on what they can immediately control – their budgets. When all you see is numbers, then the only answer is in the numbers.
The COVID-19 crisis requires more than mindless management. While no recession is simple or fun, some are more complex and pernicious than others. The COVID-19 crisis is one of them. We face unprecedented levels of uncertainty and inability to control/influence the situation than ever before. The magnitude of the economic impact is unprecedented.
Making conscious decisions regarding who pays and how they will pay provides a broader view than ‘across the board’. It is never easy to make someone pay, to cut a cost, to reduce a person’s hours or compensation. Executives can make those decisions mindlessly with simple directives. Alternatively, they can make planful decisions based on how company works and creates value. Such an approach prepares the company for the future, which should be the goal for every executive.
The Payback you can expect from making others pay