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Volume 8, Issue 5;   January 30, 2008: The True Costs of Cost-Cutting

The True Costs of Cost-Cutting

by

The metaphor "trimming the fat" rests on the belief that some parts of the organization are expendable, and we can remove them with little impact on the remainder. Ah, if only things actually worked that way...
A recently reclaimed property near Buffalo, New York

A recently reclaimed, formerly vacant, property near Buffalo, New York. Offshoring and outsourcing tend to produce local surplus property, which often remains unused for extended periods. Reductions have fairly obvious effects on the organizations that undergo the reductions, but even thriving neighbors can feel the effects. Vacant or abandoned properties surrounding the facilities of otherwise healthy firms can be depressing to look at, and the long-term effects of such sights can depress productivity. When these effects are considered, it can make economic sense for healthy firms in such circumstances to develop neighboring properties, lest those healthy firms themselves become less healthy. Photo courtesy National Vacant Properties Campaign.

When organizations cut costs, decision makers often assume that the parts of the organizations that remain after the cuts can continue to produce at pre-reduction levels. They rarely do. For example, downsizing the Purchasing function can have ripple effects throughout the organization. And canceling one project can actually affect other projects even if they don't depend on the canceled project.

Fundamentally, organizations are systems. Moreover, they don't "factorize" easily — their parts are interconnected in ways that are outside our awareness. These interconnections sometimes propagate the effects of cost cutting. We tend not to notice these channels, in part, because they don't correspond to connections in the org chart or line items in the Chart of Accounts.

Unexpected propagation happens because the effects of cost cutting tend to travel not only along formal lines, but also along personal lines — that is, the relationships between people, and the perceptions and emotions of everyone in the organization, including the people who we believe ought to be "unaffected" by the changes.

Here are some examples of how the effects of cost cutting propagate. If your job entails estimating how much time or effort tasks require, and if your organization is in the midst of reductions, you'll do a little better if you take these effects into account.

Personal network disruption
Waves of reductions in force tend to disrupt the networks people use to find out how to do things — how to prepare requisitions, which procedures to follow, or where to find the answers to burning questions. Relocations and site consolidations have similar effects.
Change-driven chaos
The effects of cost cutting
tend to propagate along
personal lines — perceptions,
emotions and the relationships
between people
The entire organization can descend into change-driven chaos. People become distracted and performance degrades, especially when procedures and job responsibilities change rapidly. Many begin working for new supervisors, with whom they must establish new relationships. Some find themselves working for supervisors with whom they might have unpleasant history.
Termination-induced grief
When groups of friends are separated because some have been terminated, the survivors enter a period of grieving, sometimes called "survivor's guilt." Their productivity can degrade significantly.
Voluntary turnover
When things get sour, people begin to fear they will be targeted next. Those with alternatives elsewhere (usually the most talented) start job searches preemptively. Vesting schedules for stock options, profit sharing, and pension plans lose their ability to hold people, because of skepticism about the value of the underlying benefit.
The what's-the-point effect
People who notice ways to reduce costs, and people who would otherwise either contribute innovations or prevent catastrophes, start to ask, "What's the point?" They begin to feel that they won't be rewarded for their trouble, or that they might be terminated before being rewarded with the next merit pay increases, which have often been suspended anyway.

If you're weighing a decision to cut costs, estimating the full impact of these effects might improve the quality of your decision. And remember that personal network disruption, chaos, survivor's guilt, and the rest, might affect you, too. When that happens, it can degrade your ability to notice these effects. Is it already happening? Go to top Top  Next issue: Communication Templates: I  Next Issue

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