In many sectors, 2008 has been a tough year. There are very few people that expect that 2009 will be much better, and most indications are that the foreseeable future will be at least as challenging, if not worse. How people and organizations deal with these difficult times is a strong indicator of how well off they will be as the situation improves - or whether they are still around at all.
Most organizations tend to hunker down when the economy is suffering (or when revenues aren’t what was expected) in an attempt to wait out the storm. Battening down the hatches essentially puts us into a hibernation mode that, while reducing our expenditures to the bare minimum, also increases the likelihood that we won’t have the reserves to get started up again when it is time to wake up.
Unfortunately, the approach taken by many is to focus solely on the cost side of the equation, slashing wherever possible in an effort to keep that balance sheet balanced. This becomes yet another reason to downsize (or rightsize, or trim the fat, or whatever euphemism you think will soften the blow). Those left are often asked to carry additional tasks that were once done by those who were cut. Many companies reduce what is seen as discretionary spending: I have some clients that have reduced travel costs by leaning more on teleconferencing and e-mail, others that have declared a moratorium on classroom training.
Sure, these budget items are reduced, but how does the bottom line fare? What value is lost along with these costs? What shape are you in when it is time to get moving again?
Generally as companies grow and increase resources, there is an opportunity to improve efficiency through specialization. Indeed, expertise in a wide range of areas required to run a successful business rarely comes a single package, and the urge to ‘wear several hats’ as a means of reducing salary costs needs to be balanced. All too often, as junior people are sacrificed, those more senior people that carry the additional burden end up being distracted from what they have been able to focus on in the past. Be sure you continue to have a clear strategic focus.
Cutting costs through reduction of rich face to face contact needs to be carefully considered. For routine discussions or where information can unambiguously be passed through documents and reports, e-mails or phone calls, sure, cut your costs. For situations where you need convergent thinking, where rich information needs to be passed back and forth, make the effort to get together to gain a truly shared understanding.
Reducing training costs might seem like a reasonable thing to do, and for many organizations where training is perceived as a perk or is not carefully managed as a means of improving critical skills, this might be the case. Alternatives to reducing training costs for these companies might be to more closely align training with strategic goals, as a means of enhancing skills to better deal with the increased challenges.
In a strong economy, companies can continue to thrive even as the inefficiencies grow. Particularly in technology companies, it is quite common to be running at perhaps 60% efficiency and still be profitable (if rework and poor product quality are indicators of inefficiency). For startups, it is easy to imagine them running at less than 50% efficiency, particularly if they are being pushed hard by less than savvy outside investment or don’t have the breadth of expertise to smoothly run operations.
As times get tough, the response should not be to simply cut costs, but to improve our understanding of where costs do not add appropriate value, by stepping back and improving our oversight. Effective organizations will use times like these to focus inward, understand where investments of effort and resources add value, and to direct efforts toward strategic initiatives that will make them stronger.
These strong organizations will evolve rather than hibernate.
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