In these recession-hit times, most organisations have jumped on the “cost-cutting” bandwagon to stay afloat. The argument runs like this : since we do not have enough orders to generate sufficient profits to take care of our “standing costs” let us cut our costs to keep alive. A reasonable argument, one may say, but not entirely without its own problems. In the name of cutting costs, what is often happening is that “opportunities” to expand or even consolidate business are being lost.
Secondly, since “cost-cutting” is the accepted corporate mantra for today, many people down the line, in a “please - the - boss - effort” are simply cutting costs by cutting activities be it training, essential maintenance or even development (product or market) work. This is hardly the prescription for preparing for the good times when it comes. Thus, in the name of going lean, not merely fat but also muscles, and sinew and sometimes even the bones are getting cut !
The response formulated is a sure prescription for prolonging the recession, not combating it. If drop in demand has been identified as one of the causes of the recession, then efforts should focus on how to revive and increase the demand. Instead, most people are cutting down on their activities, in tune with the reduced demand, in an effort to save costs. How, exactly this will help to revive demand is difficult to fathom.
What in reality is happening is that in the drive and enthusiasm to “cut costs” it is not costs but activities that are being cut or put on hold. To take the cost cut effort to its logical conclusion, one may well decide to stop all activities which will stop all costs !!
As the title of this article postulates, the focus must change, from cutting costs, which is an across the board sweeping step that cuts out both the good and the bad, to elimination of waste, which will not only cut costs but also make the resultant output more efficient, and less costly. This may possible help to sustain, revive and eventually increase demand.
What are the cost cutting measures that industry is taking ?
1. Cut manpower
2. Cut all capital expenditure
3. Suspend all maintenance and renovation / rectification activities
4. Cancel all training (the favourite refuge of all “at-a-loss-what-to-do” management)
5. Downgrade travel entitlements from air to train, from Ac 1st to Ac 2-T, from Ac-2T to Ac 3-T and so on.
6. Stop / reduce entertainment allowances
7. Reduce size of New Year’s Diary.
8. Cut down / eliminate Greeting Card mailings
Let us look at a few of the above examples and see the ramifications, in actual practice. Take the case of cutting down travel entitlements in respect of Class of Travel. Managers who were entitled to travel by air are being asked, in many companies to now travel by rail. This, of course, saves money but it also takes more time and very often travel has to be re-scheduled as train tickets are not easily available at short notice. So how do you judge the “money-saved” due to travel by train vis-à-vis the additional cost incurred due to delaying a particular meeting or the manager being away for a greater period from his place of work owing to the obviously longer time spent over train travel.
Indeed, the bigger question is not the class of travel and the amount saved or expended, but rather, was that particular trip at all necessary or could it be avoided ?
So instead of focusing on costs and downgrading the “class of travel” to save money, the effort should be to cut waste and examine, de novo, whether the travel is at all required !! Can the job be done by someone who is already there at the destination or who can reach there through a much shorter journey ?
This kind of “false savings” are very common in case of various HO meetings and All India conferences being held by organisations these days. Forty participants, when downgraded in their class of travel represent a substantial “cost reduction” that all take great satisfaction in crowing about ; the more relevant question is “should the conference / meeting have been held at all ?” Could it have been totally avoided or restricted to a smaller number ?
I am reminded of a story that a friend of mine who is an Executive Director in a large Petro-chemical company related to me about an incident in his company. A proposal came to the Board for approving the purchase of some 20 motor-cycles of a particular Brand for the sales representatives. Another Director who apparently was fairly knowledgeable about motor-cycle felt that some other brand would be a better buy and gave out some “technical statistics” to prove his point. The proposers were summoned and asked to furnish full technical details along with costs of accessories, for a number of brands and a revised proposal was submitted. After considerable debate spread over 2 meetings the best “cost-feature” combination product was chosen and the purchase approved. However, my friend mentioned with a wry smile, nobody questioned or asked “whether the motor cycles were at all required or why they had become necessary all of a sudden now ” !! This is a classic example of cutting costs while letting waste continue.
Similarly, let us consider the question of maintenance of plant and machinery or buildings or some piece of office equipment. At times like these there is a knee-jerk reaction across the organisation to stop all such expenses ; very often “strict circulars”: are issued on the subject, warning of dire consequences in case of violation. A little reflection will show how short-sighted such an approach is.
If some asset needs repair, the earlier it is done the less it costs. If a machine is making noise, it is better to immediately attend to it, locate the fault and make the necessary correction or replacement. In the name of cost cutting, if the problem is allowed to remain dormant or ignored, tomorrow there may be a complete breakdown as the bent shaft may damage the gears or a damaged bearing may cause “seizure” of the entire equipment due to over-heating.
Building collapses / industrial accidents, many with fatal consequences, are living examples of the consequences of “cutting costs “ by delaying /avoiding essential repairs.
Whenever such tragedies occur, top management changes its tune to accuse the “operating personnel” of taking its instructions too literally and pushes responsibility for not carrying out essential repair in time on them. The subordinates are accused of not having enough sense to warn the top management of the “essentiality of the repair / maintenance work required”.
“Nobody brought this situation to my notice ; otherwise I would have immediately sanctioned the funds required for this repair replacement”. “When I said no repairs now, obviously it does not apply to emergency cases.” This is the refrain of the bosses. Nine times out of 10, this is a refuge taken after the event. Otherwise, the instruction is “no repairs activity will be undertaken without specific sanction during the next so many months”. It is made abundantly clear that no time should be wasted in even making proposals for such repairs. If some foolish junior still makes suggestion that something needs to be attended now, it is shot down at the very first stage by his immediate superior saying “why are you wasting time ; nothing is going to be approved now. Try to manage somehow !! “. Some of these superiors will then go on to the next higher level and take credit (!) for having postponed the expense by having made some chancy-iffy-makeshift arrangement which will be touted as an example of their engineering / creative prowess !!
What about training ? There seems to be complete unanimity in corporate India on this issue for the past one year --- this is not the time for training. Surely we cannot spend money on training when we are passing through difficult times. Indeed, this proposition is considered so self-evident that there is actually an expression of surprise bordering on irritation when ever there is a suggestion for training.
This approach, however, misses the essential point that difficult times demand new responses and some of these responses can only be crafted if you are trained for it. It enjoins upon the organisation to come up with new approaches rather than trying more of the classical / regular methods that have so far been used to. This is only possible if people “unlearn” their past solutions and “learn” new methods for which, training is one of the important tools. As has been said very succinctly, if training your people is costly, not training them is even more costly.
The other advantage of continuing with training in these times is that people are actually available for undergoing training uninterrupted as contrasted with normal times when the person who requires training or who would benefit most from training is ‘never free” and therefore people who finally get sent for training are not the ones who need it but who are “available”. Now that the right people are “free” for training, training itself is being suspended. We are being inundated today with Chairman’s speeches replete with words like vision, the new millennium, global competition, challenging markets, fierce competition, “people are our true assets” and suchlike. However when it comes down to “building up these true assets to world class capabilities” everybody seems to believe that “not training” them is the best way to help them develop. Innovative thinking indeed !
The issue is really not all that complicated. If you have a cash flow problem, no doubt you have to cut expenses. If you have an earnings / surplus problem, no doubt you have to cut expenses. The important question is what must you cut ? What should be hacked first, and what must I avoid cutting or putting off ?
When your approach is “cut costs”, it is a general advice that allows people to show results and earn kudos by cutting anything, since any cut in any activity will inevitably cut costs.
On the other hand, if the approach is “cut waste” then only the flab gets attacked ; the muscle and the sinews and the bones remain, leaving the organisation lean and fighting fit after the exercise. In the process, you may actually generate a surplus that allows you to compete more aggressively in the market place and prosper even in these recessionary times. In any case, it tones up the organisation, significantly improves morale, and makes you better prepared for tomorrow.
There is, yet another implication of the “cut costs approach”. As mentioned above, this approach of cutting costs is being taken “because times are bad” ; this is the reason that is being cited as the justification for the cost cutting & stringent expense control approach. Under these circumstances, even if some wasteful activities get temporarily suspended, the unstated assumption is that when times are better, we will restore all the cost cuts ; in other words resume our wasteful practices also !
On the other hand, when you focus on wasteful practices, you are clearly identifying and eliminating practices that will never be allowed to come back. This is a permanent gain for the organisation. Of course, you will also be achieving significant cost cuts or, what I would prefer to call, cost savings, which are really bottom-line earnings.
It is time, therefore, that if we wish to compete globally, we take this recession in our stride, since such business downturns will come again and again. Instead of panicking and responding defensively, let us utilise this opportunity not merely to lose weight by cutting costs , but to grow muscles by cutting waste.
September 24, 2001
Mumbai
