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The Stupid Futility of Cost Cutting

Why is it that the first instrument many executives reach out for when sales start slowing down is the scalpel? They cut long-term employees, critical operational workers, shutter production facilities, tamp down on capital expenditure, reduce R&D to some arbitrary percentage of the dwindling sales, and stomp on other product innovation programs. They sell so-called non-core assets to focus on bread and butter operations, but starve even these critical investments to lower operating costs.

Then they wait for sales to start growing when general demand starts coming back across all sectors of the market and the economy. Something is sorely missing here. What products will the cost-cutting company feed into the market to fuel its growth and capture market share? Who will drive the sales, support after-sales service, invent new devices, and provide critical mid-level leadership? I was reminded of these questions when {complink 3847|Nokia Corp.} announced its latest job cuts, which in some ways mirrored what has been happening at rival mobile handset manufacturer {complink 4644|Research In Motion Ltd. (RIM)} as I pointed out in an earlier blog. (See: Nokia Job Cuts Don’t & Won’t Impress Anyone.)

I'll make this short. Cost-cutting does not ignite growth, no matter what any management guru has published. Unfortunately, in the electronics industry as well as in other manufacturing sectors, this seems to be the only strategy many executives would rather wield as a defensive weapon against loss of profitability. They've got it wrong. Instead of going on the defense, perhaps they should instead go on the offense. My favorite example in this regard is {complink 2657|Intel Corp.}, the world's No. 1 semiconductor company by revenue and one of the most successful enterprises in the electronics industry.

Intel plays in a highly cyclical market, but the company has learned never to forget the ups when it is going through the down cycle. During periods of recessions, Intel typically jacks up capital expenditure and R&D and conducts minimal layoffs. The senior executives insist that the extra spending would allow them to burst out faster than the competition when the market starts to accelerate. Most of the time, they've been right, and that has helped them beat microprocessor rival {complink 103|Advanced Micro Devices Inc. (AMD)} into a pulp. It's in fact a joke today to call AMD and Intel rivals. How could they be truly considered competitors when the revenue gap is as much as $45 billion — in favor of Intel?

Yet investors regularly applaud the company that — facing a stiff sales headwind — simply announces employee attrition through layoffs, buyouts, and asset disposal. Years later, the same company is in the same muck but this time may lack the employee resources to climb out because the best workers have flown the coop. There's a time to retrench workers, but overused, this strategy will cut both ways and sometimes deeper than management would like. For an industry dependent on super brainy and extraordinarily talented people, I am beginning to think electronic equipment manufacturers and their suppliers might have followed investors down the wrong hole.

18 comments on “The Stupid Futility of Cost Cutting

  1. djlevy
    June 15, 2012

    Cost-cutting should be the method of last resort. The focus should be on adding value and reducing waste in operations. Those initiatives can simply never be wrong. 

    If you implement wate reduction and value add, you will not be tempted to cut costs.

     

  2. owen
    June 15, 2012

    It seems to me that at any given time a Company may indeed face the prospect of having to reduce one of their highest expenses, namely payroll. Given no alternative it also seems obvious that cutting hours rather then jobs would be eminently preferable for several reasons. First, the need for re-hiring, and re-training would be eliminated. Second, moral throughout the Company would be less effected (it might even improve given the alternative). And third, the social stigma, not to mention the unemployment costs, would be minimized. There is also the Corporate fallout, be it in the stock market or the industry that would be mitigated. Cost cutting is never easy, nor is it always futile. 

  3. bolaji ojo
    June 15, 2012

    Owen, Cost-cutting isn't in itself futile, nor is it always stupid. There are elements of the two, though, when it is used indiscriminately and without a longer term vision for the enterprise. I see cost-cutting as more of a readjusting of resources to improve operational performance but it should not be carried out at the expense of the institution of a viable sales growth strategy.

    I have twice in my career been laid off due to the wrenching changes occuring in the media market and won't deny the utility in the two situations. It might happen again to me and I am always conscious of this. You identified several things a company could do differently but very few executives do this nowadays. When sales fall, out comes the axe has been the typical action. It's a game of numbers. It should be a comprehensive game that also advances a growth strategy, though.

  4. Ariella
    June 15, 2012

    There are 2 reasons why I think businesses tend to cut jobs altogether rather than cut back hours. One is simply due the sort of in-the-box thinking the managers typically use. A job is defined as full-time, and they see it as an either/or situation. You either cut it out completely, or decide it is still needed and cut another instead. It is the same type of thinking that prevents employers from allowing workers to share jobs, so that each one works part-time (something many parents would prefer, though very few are given that option). The other reason they would prefer to cut out the job altogether is that each employee cost is not limited to salary but also benefits. Many companies pay into the group health insurance, pension, and even life insurance. If these amounts are cut, the employee may find that s/he can't float the cost on his/her own without the full employer contribution. 

  5. Barbara Jorgensen
    June 15, 2012

    What makes all of this worse is that the executives making these decisions rarely feel the impact on their pocketbooks. There have been a few examples of executives taking $1 salary when things were going badly for their company in the past. I haven't heard anything to indicate the pain is being shared across these organizations. 

  6. t.alex
    June 15, 2012

    From my experience those companies, who resort to extreme measures of cost cutting and especially chopping off human resources, really suck. It is really hard to get new people as noone wants to work for them and those current employees are always in the unhappy and nervous mood. Sales of course is stagnent for long time.

  7. Anna Young
    June 16, 2012

    Owen, in addition to your view, I think cutting cost is not always futile, at one point or the other a company might be forced to reduce its operational cost in order to keep afloat. What I found amusing, particularly in recent job cuts incidences, is the draconian measure taken by these organizations. For example, in the case of Nokia's plan to lay off around 10.000 of its workforce, I doubt whether this is the only option opened. I'm aware that these plans may be executed in stages to reduce the impact on the organization. But the share thought of the number is unbearable.  Might there be other option(s) as opposed to the draconian plan? I don't know.
    But what I think is that measure to cut costs should never come at the expense of the ability to execute a long term vision. Thus, will reducing a company's workforce bring about a long term vision? Will it increase the company's image and market position? Yes it might just stabilize the overall running cost. But at the expense of making redundant good and honest workforce that should help to reshape the organization. Ok agreed, the cuts are inevitable. So if a company decides to cut back on its payroll, how does the management arrive at this decision without damaging the prospect of a future growth? I strongly agree with your view Owen that when it becomes crucial for a company to reduce its operational cost, laying off might not be a viable option. When a company plans to cut back, why not evenly cut salary/benefits across the board as opposed to lay- off? Don't just target the tail end .

  8. _hm
    June 16, 2012

    @Bolaji: This is very interesting point of view and I totally agree with it. Many a time, top executives hands are tied and he gets wrong information from his subordinates. All top people wants to retain their own unproductive people and sacrifice highly productive staff like design engineers and others. In process, compnaa goes further down. Design engineer always gets better opportunity. This is folly on part of management. They know it very well, but they will never try to correct it. It may not be possible.

     

  9. FLYINGSCOT
    June 16, 2012

    I agree with you Bolaji.  The sad turth is that most listed companies are puppets to their shareprice and shareholders.  As such top execs are rewarded on very short term financial targets.  Execs come and go and many have very short term selfish goals. A useless exec can come in purportedly to turn a company around.  She (fictitious “she or he”) gets $300k base and RSU stock award worth $2M over 3 years.  Simply by not getting fired until year 2 or 3 she can retire a millionaire even if the shareprice stays flat.  If she is a real shark she can slash costs all over the place and sales (due to momentum) stay flat but the bottom line looks better and the shareprice rises so the RSU award is worth even more.  Once at a dinner such a sen VP told me he would be better firing everyone in the company except sales and order fulfillment people to push the shareprice up and then cash in his stock awards, then leave.  I wish we could find a better way to incentivize execs to do the right thing for the company, its employees, the community, the environment and also the shareholders…..or am I just dreaming.

  10. Wale Bakare
    June 16, 2012

    Those top executives do not take such decision only but i still believe financial advisers and investment bankers also get input in cut back whenever the situation arises. To them laying off old & experienced ones, who are on severance pay packages, health insurance and other benefits is always the best.

    Meanwhile, I hardly believe getting new hands that difficult to achieve – have it mind that technologies are changing quick, employees' appraisals take place periodically to evaulate  who could evolve with new innovations and changes within the organizations.

    Why do you think there are so many “free products” available on the internet today?

  11. Nemos
    June 16, 2012

    “They cut long-term employees, critical operational workers, shutter production facilities,”

    “Cost-cutting does not ignite growth, no matter what any management guru has published.”

    I totally agree with everything you have mention. The Layoffs it is the easiest way to instantly reduce your cost but it doesnt help much. In addition it doesnt help in the development of the company and this action looks like the analgesic pill.

  12. ahdand
    June 17, 2012

    Well I dont call it stupid as such because we are running in a very skidy era with the economy. I know its hard for the people who face the cost cutting factor but dont you think its beete to get the cost wastage reduceda bit rather than loosing everything in few years.

  13. Wale Bakare
    June 17, 2012

    @Flyingscot you are right. Am afraid hardly can anyone change the trend – investment bankers and lawyers hold too much power in the industry.

  14. _hm
    June 17, 2012

    Can there be better innovative way? Can hours/days be reduced for all across? To my opinion RIM was good in getting rid of unproductive and not so qualified people. For this they may start laying off people from higher management first!

  15. Daniel
    June 18, 2012

    Nimantha, CIO/executives are taking decisions based on the best analysis with the current data and statists.  But in certain cases market or business may proves that their analysis and decisions are in wrong side.  I don't think anybody may intentionally think to spoil or degrade the company. In such conditions”Survival for the fittest” is the motto.

  16. Daniel
    June 18, 2012

    Bolaji, I know certain companies are rearranging the staff fixation patterns during recession or business dull period for minimizing the lay off period. They won't shut down any department, but they rearrange/shuffle the staff across different departments. This will help the employees to build up a confidence in their employer that they won't be get sacked and more over this will help them to learn multiple skill across different departments.

  17. ahdand
    June 18, 2012

    Tue Jacob but someone has to be responsible for the mistakes. People dont mak mistakes willingly but in a scenaio where its a huge concern to many the top management will have to answe for it. And if you consider the methodology of SUVIVAL OF THE FITTEST, I feel that the CIO's and CTOs will survive where as the smaller guys will perish.

  18. bolaji ojo
    June 18, 2012

    Jacob, You assume management objectives and what's best for the company are necessarily the same. Today, a CEO must show immediate results and may find it difficult to align longer-term goals with what shareholders want right now. Analysts measure corporate performance on a quarterly basis and this may not always be in line with what's best for the company.

    A management team can decide to not cut jobs because they believe this will position the company in future for strong growth but they may pay dearly for this in market valuation and shareholder perception.

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