Ask the experts

/ 01 September 2009

Each issue, industry experts tackle our most common management dilemmas. This month, the focus is on cutting costs

Betsy Kendall Executive director at OPP, a business psychology consultancy

‘When 10% of a large workforce downs tools and wastes working hours at the rumour mill, the other 90% absorbs the slack almost imperceptibly. When 10% of an SME’s employees lose the will to work, on the other hand, disaffection ripples through the work network at speed; an epidemic of negative ‘groupthink’ savages productivity. Your ability to manage your cash and deliver a profit is under threat. So, if creating a strong sense of communal purpose and leading by the values that made your company a great place to work in good times may seem like a luxury when cash is king, make no mistake: abandon this course, and people react - and the numbers react accordingly.

The first thing, then, is to constructively communicate the business rationale for change. From a psychological perspective, change thrust upon people is stressful, but giving them a line of sight to financial objectives the company must achieve and why, will help them move to acceptance more quickly. Involve your managers in this communication process, leading task forces for cost savings, idea generation and implementation. Meetings without biscuits, the disappearance of water coolers and flowers, and tightened expenses and travel policies are all easier to take if people know that in supporting these, they're saving jobs. Have everyone who spends money in the company review their supplier relationships, give them a target for achieving more favourable prices from them and track progress for all to see.

Not all employees understand the concept – and consequences – of cash-flow. Empower them to have an impact on this. Ask all frontline staff to play a part in getting customers to pay more quickly, through service delivered 'right first time' and by using their relationships with customers to win your company payment priority.

If you truly share ownership of the challenges of survival in this unprecedentedly difficult climate, you can ask more of your people. You can, for example, offer unpaid sabbaticals, leave and part-time working; follow the illustrious lead of KMPG (and others) and implement a pay cut. If you do this, make sure it spans the organisation from top to bottom, and if senior managers bear a larger proportional load than most, what they lose in their pay packets they'll reap in discretionary effort from their teams.

Don't lose sight of 'the upside' – now’s the time to create truly sales-focused organisations. Make the customer more visible through posters, ‘wins’ bulletins and salespeople sharing market news and stories at other teams' meetings. Find ways to talk to customers – through email, your website, webinars – that save promotional spend but maintain market presence. Train a couple of staff whom you need to retain – in HR or elsewhere – in the use of psychometric tools such as the MBTI so that they can deliver morale and performance-enhancing 'short burst' training sessions to groups of managers and teams. They need development – and each other – more than ever right now.’

Stephen Archer Business consultant and director of Spring Partnerships, a management consultancy

‘Gina is in territory familiar to many businesses in the past year – take British Airways, for example. It's time to get tough, but also time to use that pressure to bond the team. These situations sort out the loyal from the jobsworths.

This is as good a time as any to flush out costs that did not need to be there, even in the good times. First, I hope that Gina has looked at all cash raising options. Slower payments negotiated with suppliers and faster payments negotiated with customers – this may require incentives and cost some percentage, but cash is king. Can any assets (especially non-core to the business) be sold off? Is there a sale and leaseback option anywhere? Is there any property space that could be let or sub let?

Sometimes it makes sense to rationalise what is sold so that the high profit lines are focused on. This may mean cutting the lines available and with it the people who made or handled the products. You have to be ruthless about what makes money and what the business stands for. Can any part of the business be sold off in a trade sale to a competitor? Is there a non-core side to the business?

When it comes to people, everyone must be told the truth. People are smarter than you think and will understand – even if it affects them personally. There are a few options: ask everyone to forego overtime payments or ask them to take a 10% salary cut – for however long it takes. This gives Gina some flexibility. Ask everyone to suggest how costs may be cut to save the business. Be prepared for some unpalatable suggestions but discuss them openly and reason with them as to why one idea is OK and another not. An option may be a pay 'holiday' of some kind.

Finally, if these suggestions aren’t workable, you have to look at layoffs. Remember that redundancy costs money so this is no free ride. But a hard look at the 70 people will uncover maybe 10% who are dispensable and whose productivity 'gap' can be taken up by the other people – willingly. The remaining 63 will be glad that the 10% have gone in many cases and glad to have survived.

Be honest, open, bold and fast. Remember that it can be done.

Dr Jerome Couturier Associate Professor, ESCP Europe business school (London)

‘When it comes to cutting costs on a short-term horizon, most business owners fear they might have to get rid of some of their employees, resulting perhaps in committed staff losing their motivation to deliver their best. Before thinking of axing jobs, it’s first worthwhile looking at the non-labour costs. Indeed a great deal of (apparently) small cost items might turn into substantial amounts when they are all added altogether. Gina might find it helpful first to review those, for instance telecommunication bundles, non-critical advertising expenses, suppliers’ payment terms, reducing the frequency of travel, postponing the renewal of non-critical material. She might also try to renegotiate her loan conditions with her banker or evaluate opportunities to re-schedule any of her outstanding or due tax payments.

Obviously, when the workforce accounts for a sizeable part of overall costs, it might become challenging not to deal with it. Here again the choice for Gina is more than just the classic dual one – laying off staff members or not. When we force creativity to come into play, we can see more flexible options, as recently illustrated by BT asking their staff for temporary salary cuts, or other companies advising their workforce to use up their holiday, or to move to part-time employment. It might also be the case that Gina could ask some of her employees to leave the company’s payroll while still working as self-employed contractors for a limited period of time (and obviously within the limits of employment law).

Most large organisations have recently set up ‘bottom-up’ programmes asking their employees to suggest short-term improvement ideas. Tens of millions of savings have so far been obtained in companies like giant telecoms operator Orange and many others across the country. This applies perfectly well to small businesses too.

Employees often know best their day-to-day activities and can suggest ways to improve them. Not only can this help reduce costs but it involves staff in the decision-making, encourages creative thinking and boosts employee engagement at a time when your staff are feeling vulnerable. It is often in tough times that real teams emerge, sharing a common mindset after brainstorming together on critical decisions.’