With the recent stock market turmoil companies are once again turning their attention to cost containment.  In a slowing economy companies typically look for ways to reduce costs in order to bolster the bottom line.  Growing revenues begins to look more challenging than reducing costs.  On the surface this might look like a smart idea, however, the long term impact of focusing on cost cuts can be quite damaging.

"Cost out might look like a smart idea on the surface, but the long term impact on an organization's culture will be quite damaging."

The best organizations tend to run lean all the time.  They manage expenses effectively, but invest wisely in revenue generating activities.  When organizations begin to focus on cost out, they tend to attack the biggest cost centers first without regard for the residual impact.  Those costs more often than not are related to headcount.  A reductions in force (RIF) might create a short term income statement win, but the long term impact can be crippling to an organization. 

Recently a major corporation conducted a round of layoffs in order to cut costs.  The administration devised a criterion by which they chose which of the staff to cut.  Treating people like durable goods they applied the accountant's LIFO (last in first out) approach.  So the employees with the least tenure were the first to be let go.  At first this approach might sound fair and reasonable, but think about the impact on the employment brand and reputation.  Those that were hired most recently are the people who the organization just spend significant time and money trying to attract to their organization.  Cutting them first will have a very detrimental impact on the employment brand.  

The layoffs came as a surprise to the entire staff and were extremely demoralizing.  Very little was done for the survivors (those who did not lose their jobs).  As a result, the remaining staff is now shorthanded and forced to work longer hours and to maintain the same level of service with fewer resources.

On paper the cost out activity looks good.  The financial performance for the next quarter, or even for the next several quarters, might look better, but the long term damage won’t be seen immediately.  As a result of the actions the workforce culture has taken a serious hit.  Workers are worried about future layoffs, they have been forced to do more with fewer resources and the overall mood of the organization has taken a hit.  While these soft costs are difficult to measure, they are real.  Some questions that come to mind:

  • Will voluntary turnover increase as a result of the layoffs?
  • Will production suffer as a result of being short staffed?
  • Will employees give the same level of discretionary effort?
  • Will customers begin to notice a change in the level of service?
  • Will the organization be able to attract and retain top talent going forward?

Short term gains often result in long term pain for an organization.  While cutting costs is an option to consider, it is important for organizations to be fully aware of the long term impact.

Many companies invest significant financial resources in attracting, developing and retaining talent.  Creating a reputation as an employer of choice takes time and money.  Taking cost out of the business can severely jeopardize the culture related efforts that organizations work so hard to create and maintain.

So next time you are evaluating cost reductions, include in the analysis the significant hidden costs associated.  Maybe there is a better way to drive business results and improve the bottom line.