The True Costs of Cost-Cutting

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?  Top    Next Issue

Are your projects always (or almost always) late and over budget? Are your project teams plagued by turnover, burnout, and high defect rates? Turn your culture around. Read 52 Tips for Leaders of Project-Oriented Organizations, filled with tips and techniques for organizational leaders. Order Now!

Your comments are welcome

About Point Lookout

Thank you for reading this article. I hope you enjoyed it and found it useful, and that you'll consider recommending it to a friend.

This article in its entirety was written by a human being. No machine intelligence was involved in any way.

Point Lookout is a free weekly email newsletter. Browse the archive of past issues. Subscribe for free.

Support Point Lookout by joining the Friends of Point Lookout, as an individual or as an organization.

Do you face a complex interpersonal situation? Send it in, anonymously if you like, and I'll give you my two cents.

Related articles

More articles on Organizational Change:

He's No Longer Here

Sometimes we adopt inappropriate technologies, or we deploy unworkable processes, largely because of the political power of their advocates, and despite widespread doubts about the wisdom of the moves. Strangely, though, the decisions often stick long after the advocates move on. Why? And what can we do about it?

Comfortable Ignorance

When we suddenly realize that what we've believed is wrong, or that what we've been doing won't work, our fear and discomfort can cause us to persevere in our illusions. If we can get better at accepting reality and dealing with it, we can make faster progress toward real achievement.

How to Find Lessons to Learn

When we conduct Lessons Learned sessions, how can we ensure that we find all the important lessons to be learned? Here's one method.

Contrary Indicators of Psychological Safety: II

When we begin using new tools or processes, we make mistakes. Practice is the cure, but practice can be scary if the grace period for early mistakes is too short. For teams adopting new methods, psychological safety is a fundamental component of success.

White Water Rafting as a Metaphor for Group Development

Tuckman's model of small group development, best known as "Forming-Storming-Norming-Performing," applies better to development of some groups than to others. We can use a metaphor to explore how the model applies to Storming in task-oriented work groups.

See also Organizational Change and Organizational Change for more related articles.

Forthcoming issues of Point Lookout

Coming May 14: Working with the Overconfident

A cognitive bias known as the Overconfidence Effect causes us to overestimate the reliability of our judgments. Decisions we make based on those judgments are therefore suspect. But there are steps we can take to make our confidence levels more realistic, and thus make our decisions more reliable. Available here and by RSS on May 14.

And on May 21: Mismanaging Project Managers

Most organizations hold project managers accountable for project performance. But they don't grant those project managers control of needed resources. Nor do they hold project sponsors or other senior managers accountable for the consequences of their actions when they interfere with project work. Here's a catalog of behaviors worth looking at. Available here and by RSS on May 21.

Coaching services

I offer email and telephone coaching at both corporate and individual rates. Contact Rick for details at rbrenDJpmhgyaDTwBQXkhner@ChacmGoYuzfZpOvDQdRkoCanyon.com or (650) 787-6475, or toll-free in the continental US at (866) 378-5470.

Get the ebook!

Past issues of Point Lookout are available in six ebooks:

• Get 2001-2 in Geese Don't Land on Twigs (PDF, )
• Get 2003-4 in Why Dogs Wag (PDF, )
• Get 2005-6 in Loopy Things We Do (PDF, )
• Get 2007-8 in Things We Believe That Maybe Aren't So True (PDF, )
• Get 2009-10 in The Questions Not Asked (PDF, )
• Get all of the first twelve years (2001-2012) in The Collected Issues of Point Lookout (PDF, )

Are you a writer, editor or publisher on deadline? Are you looking for an article that will get people talking and get compliments flying your way? You can have 500-1000 words in your inbox in one hour. License any article from this Web site. More info