The Cost-Effective Organization Web Site

Question and Answer Columns












Home | Excerpts | Tips | Q&A | Books





Is There Life After Downsizing?
















cover.jpg

Downsizing. Cost-cutting. Restructuring. Whatever word you use, the process has been near-universal over the past few years. Yet cost reduction is only part of the path toward becoming fully cost effective. A survey that we conducted showed that most companies had done the right things to reduce costs during downsizing. For example, 95 percent of the surveyed companies reported that they had taken steps to do work more cheaply (such as contract out work) or eliminate unnecessary work.

But what about after downsizing? The same survey showed that fewer organizations implemented the steps necessary to prevent costs from creeping back up as the economy recovers. For example, fewer than half of the surveyed companies (48%) had built explicit cost containment goals into their overall compensation system, or developed a routine procedure requiring managers to implement cost reduction initiatives on a regular basis.

Successful ongoing cost reduction requires four elements:

  • Planning (develop a clear plan for your organization and link the budget to the specific items in the plan)
  • Pruning (teach managers and employees to constantly rethink their activities and prune back unnecessary work)
  • Compensation (link compensation for each employee, at least in part, to their success in controlling costs); and
  • Communication (continually communicate the need for effective cost control).

These four steps represent the best method for avoiding the traumatic layoffs and restructurings of the 1980s and 1990s.

Q. Our company has instituted a suggestion program. Any employee with an idea for reducing costs is invited to submit that idea in writing. Winning ideas get a cash award. From my perspective, it's hard to see that this is having any impact on our costs, which just seem to keep going up. What is your experience?

A. There may be successful "suggestion box" programs to reduce costs, but I haven't seen too many of them. In many cases, employees get frustrated when suggestions aren't acted upon. In other cases, the awards are trivial. But the worst aspect of such programs is that they teach employees that doing business-as-usual is expected, while coming up with innovative ideas to reduce costs is unique and deserves a special reward. Cost reduction should be incorporated as a goal of every employee -- and every employee's compensation should be based, in part, on the success they have had in achieving that goal.

Q. We've instituted a "reengineering" program at our company, and have come up with a number of excellent ideas. For example, our small business has joined with other small businesses in a purchasing consortium that is saving each company thousands of dollars a year. I'd strongly recommend reengineering for any company, based on our experience. It's helped us completely rethink the way we do business.

A. Let's add one important factor. Reengineering should be an ongoing process, not a one-shot event. You'll be surprised how quickly new ideas can emerge in a changing global environment, and with emerging technologies. We've sometimes found that designing computer systems is like refinancing your home: Even though you've already done it once, it may pay to turn around and do it again!