Current economic conditions and the pressures of inflation are causing companies to reevaluate and rationalize their cost structure. As a result, there have been widespread layoffs across various industries as companies try to stay afloat.
Many companies adopt an across-the-board, one-size-fits-all approach to cost cutting (e.g. cutting 20% across the organization). Accounting is cut by 20%. IT is cut by 20%. HR is cut by 20% and so on. This is a problem, because not everyone is starting from the same place.
Suppose an organization decides to lay off 20% of their workforce across the board by the end of the month. The fundamental problem with this (aside from associated severance costs) is that the costs end up creeping back in because the organization failed to thoroughly examine who was being laid off and why. The work is still there and needs to be done—there’s just no one to do it—so the organization hires contractors. Contractors aren’t part of the employee “headcount,” but they still cost as much if not more than full-time employees. In the end, costs aren’t really cut at all.
A more structured approach to cost cutting is required to see real, long-term benefits. Many of our clients are taking a proactive approach and cutting costs not in response to an event but in response to what they see coming down the pipeline.
How to Cut Costs for the Long-Term
We recommend a 3-step process outlined below:
1. Set internal targets rationally
Setting targets involves focusing on the business from a macro perspective and evaluating operating entities. For example, suppose you’re an executive of a restaurant chain with 5,000 restaurants across the country. Inside the restaurant are cooks, servers, managers, bartenders, etc. Outside the restaurant are support functions like accounting, purchasing, HR, marketing, legal, facilities, etc. You’re needing to cut costs—but where to start? In a cost cutting effort, costs are not typically cut at the customer service level, so support functions must be evaluated.
It’s important to rationalize job roles from an individual operating entity perspective. If you just had onerestaurant, how many people outside the restaurant (support functions) would you need to keep that one restaurant running? After analyzing their workforce, organizations can identify gaps, determine where employees are not needed, and identify what value is added by justifying an increased headcount.
2. Understand the why
After identifying gaps, it’s important to gain a deeper understanding into why each support function is needed. Say you’re a global organization needing an internal tax team to address a variety of international tax issues. Here’s the why: This internal tax team would be helping your organization optimize your tax position, which adds value. By helping allocate assets and ensure the company complies with tax laws, the internal tax team would enabling your organization to save money in the long-run.
Attempting to cut costs without understanding the rationale behind the cuts will lead to confusion, unnecessary layoffs, and an underperforming team.
As organizations gain a better understanding of the why, we recommend using a RACI (Responsible, Accountable, Consulted, Informed) to map out who is involved in business processes throughout the organization. A RACI helps identify areas to cut costs by revealing where there’s duplication of effort for one business objective (e.g. two departments are accountable for the annual budget process, multiple people are responsible for producing the same reports). Rationalize roles and eliminate what does not add value. More, streamline processes and eliminate unnecessary steps.
3. Rationalize executives
To retain employees, many organizations have promoted people into VP positions. The VP or Senior VP title has become diluted with some organizations having dozens of high-earning, VP-level employees. It’s important to rationalize the VP/executive positions to ensure each adds value. To do so, we recommend asking these three questions:
Financial: Are they accountable for more than 30% of a company’s cost, working capital, or revenue?
Risk: Are they mitigating risks that are significant to a company? For example, a VP of HS&E or a VP of Legal
People: Are they managing a significant part of the workforce? For example, the Head of Sales for a 1,000-person sales force.
If their efforts in these areas are non-existent or don’t warrant a seat at the table or in the boardroom, consider eliminating these positions.
Bottom line, traditional cost cutting methods don’t work. At Trenegy, we recommend a more structured approach, resulting in permanent cost reduction. For more information, email us at email@example.com.