Cutting Room
Cut costs in a bad economy—but don’t go overboard with the shears.
By Christine Bockelman
With the United States struggling through a recession, scaling back has become somewhat de rigeur. “Sometimes, it takes a good recession to kick us in the head,” says Jay Forte, CPA, a speaker, employee performance consultant and author of Fire Up Your Employees and Smoke Your Competition. “It’s a reason to examine almost everything.”
While dumping fancy travel and client dinners is a bit of a no-brainer, there’s a right way and a wrong way to cut costs, especially when you put people and places into the equation.
People Power
When the economy heads south, the kneejerk reaction is to start cutting the headcount. Layoffs are sticky situations though. Who do you let go? The most expensive staffers? The ones who have been there the least amount of time?
“First and foremost, since your customers are ultimately funding your payroll, ask yourself, ‘If my customers were making the decisions about what and who to cut, what decisions might they make?’” recommends Ed Boswell, CEO of The Forum Corp, a Boston Mass.-based consulting company. “It might surprise you what you come up with from a customer’s point of view.”
What about your superstars—the people on your team who consistently perform the best and bring in the most business? Perhaps surprisingly to some, there are two schools of thought on how to handle your top performers during times of financial crisis.
First, the cut ‘em argument: “I would start the cutting process with the stars,” Forte states. “The idea is that stars know their value, and that someone is willing to pay for them. I generally find that high performers...say, ‘Thanks for the paycheck, but I’ve found someone willing to give me more.’ Sometimes the benefit you get from a star doesn’t make sense. Should you keep a star if they’re hard to get along with, or if they don’t fit in long-term?”
Second, the keep ‘em argument: Stars often bring much too much to the table for a company to consider letting them go. Jim Muehlhausen, CPA, author of The 51 Fatal Business Errors and How to Avoid Them, suggests that companies approach staffing decisions much as professional sports leagues do; namely, introduce a salary cap. “Companies have x number of dollars for payroll, and need to figure out what percentage of the overall payroll a star is worth,” he explains.
The National Football League offers a few good examples. Teams like the Indianapolis Colts could afford to hire or retain a lot more talent if they cut Peyton Manning and his reported $14 million a year contract from their payroll. Manning, though, is a “superstar” who helped the team win a Super Bowl, says Muelhausen. Similarly, companies should identify who’s helping them meet their goals and then figure out how much of the salary cap they’re worth.
Sure, the superstars are expensive, but they’re also hard to find. Let yours go and your competitors, if they’re smart, will snap them up.
“A great salesperson is a great salesperson, no matter what the economy. Let someone like that go and you’re only taking away a great revenue source for yourself,” says Muelhausen.
Client Cutbacks
As tempting as it is to hold onto every client, it doesn’t always make sense to.
“It’s important to keep the clients who are most profitable,” Boswell explains. “That might sound like a no-brainer, but many companies treat all customers equally. That’s a mistake.”
Hanging onto all your clients can be problematic, Muelhausen agrees, particularly if you’ve reduced your staff. “Employee burnout becomes a risk,” he explains. “If your best people are working harder and getting paid the same amount, they’re not likely to stick around.
“You have to do a customer-cost analysis,” he continues. “The mistake most people make is thinking that revenue drives expense....Some customers demand a lot more activity for the same amount of money. If you’re a $100 client with a 70 percent margin and I’m a $100 client with a 10 percent margin, you’re a much better client.”
Space Savers
Now that you’ve streamlined your staff and clients, it may be a good idea to focus on your office space. If you have fewer people, you probably need fewer desks, and even if you have the same number of people, you should ask yourself whether you can cut back on square footage.
“I think the recession is an important opportunity for firms to really look at their real-estate portfolios, especially if they’re leasing,” says Mike Hillgamyer, who overseas firm-wide operation services for Crowe Horwath.
Cutting space can be a tough call, though, especially if the economy is predicted to gain momentum anytime soon. “Business owners...tend to say things like, ‘I don’t want to get rid of that space, because things are going to pick up next year,’” says Muelhausen. “You need to be objective. If sales are down, and have been down, you don’t know for sure if they’re going to pick up in six months. Go with what you know to be true right now.”
During economic downturns landlords are likely to renegotiate the terms of a lease to keep their buildings occupied. “There are a lot of cards you can play right now. You might be able to get a reduced rent per square foot, a certain time period when you might not have to pay rent, or some tenant improvement dollars,” Hillgamyer suggests. “Landlords also might allow you to reduce your footprint if you agree to extend the lease term.”
Be creative—consider employee requests to work from home or telecommute. What’s more, at Crowe Horwath, a few offices work with a system called “Space on Demand,” a revamp of the hoteling concept.
“It might be a desk, it might be a meeting room, it might be a project room,” Hillgamyer explains. “When people do come into the office, we offer services and amenities. We’ll put pictures of their children or awards they’ve won at their desks, or give them a nice biscotti or cup of gourmet coffee.”
Also consider how and when you use your space. “We have one group that works weekends during busy periods, and instead of giving them their own floor, we have one group use a space Monday through Friday, and another use it on weekends,” says Hillgamyer.
Simply think outside the box and you’ll find the savings you’ve been looking for.
Three Cost-cutting Lessons
1. Don’t be cheap with your people
“Cutbacks can negatively affect employee morale,” says Forte. “You can let people have a longer lunch every once in awhile or be a little flexible about letting them leave earlier.”
2. Don’t insulate your employees
“You’re better off involving your people in your decision-making,” says Boswell. “They can raise ideas you haven’t thought of or confirm ideas that you already considered. They might surprise you with their creativity or their willingness to swallow tough medicine for the greater good.”
3. Don’t go layoff crazy
“Very often layoffs have unintended consequences,” says Boswell. “You could end up cutting the things your customers value most. Or you could leave your best performers exposed to burn-out...Some of the companies that emerged from past recessions in a position to grow were the best at keeping layoffs to a minimum.”
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