Avoid This Pitfall When Cutting Costs

Many organizational design projects include some cost-related components – particularly during the current challenging economic environment that constrains revenues and brings new expenses for maintaining a safe workplace. But even in good times, cutting costs and trimming head-counts are a major consideration as organizations realign their strategies and structures.

Inevitably in these types of efforts, there are counting exercises that need to be done. As the new organizational structure evolves (or even sometimes before it is even conceived), there are different viewpoints on how to cut costs by reducing resources. There are important questions on the table. How many and which employees will be kept; who will be reassigned; and whose positions will be eliminated? How many offices will remain open or how many operating sites will be consolidated?

The Double-Counting Pitfall

Typically these cost-cutting objectives are driven by the financial or accounting functions. They may set numerical goals: “We need to cut x employees” or “We need to reduce payroll by y dollars.” The managers responsible for those line functions often respond, “Yes, we need to address costs, but there are practical realities. We have certain people we want to keep, and we’re not exactly sure what the right head count should be.”

The result becomes an awkward conflict between mathematical considerations and managers who have to make sure the work still gets done. From the financial perspective, reducing spans and layers within the organizational structure should reduce expenses. Such changes may affect many employees. Managers make lists of who they want to keep and use in other capacities. You end up in the “double counting” conflict: finance is counting how many people should be let go, while managers count how many people they want to keep. Eventually, nobody is happy: managers are afraid of the numbers, so they try to hold back the restructuring so they can keep ample staff for the future.

Tackling Effective Cost Alignment

From our perspective, the problem outlined above reflects the old proverb about putting the cart before the horse. To create efficiency in the organization, focus first on the work, not the headcount. Here are a few suggestions to avoid this “double counting” pitfall when considering reductions in labor costs and other expenses.

  • Get on the same page. Make sure everyone is clear on the organizational changes the enterprise wants to undertake. All the parties involved – executives, accountants, managers, change agents – need to be aligned on what objectives they are trying to accomplish. When there is a cost-containment target, everyone needs to acknowledge that it requires more planning than simply saying, “We’re cutting 10 employees off the payroll.” Make sure everyone is clear on the strategic objectives, and then align the new organization with those objectives.
  • Avoid fear of numbers. Head-counts will change when you change how the work gets done. If you don’t change the work, the rest of the exercise will not be effective. Don’t get caught up only in the numbers while forgetting the strategic impact of rightsizing decisions.
  • Redesign the work. Don’t start cutting costs without first thinking through the tradeoffs and impacts. You have to step back from what you’re doing today, define how work can be done, and then redesign the organization and the work itself. Otherwise, you haven’t fundamentally changed the equation. Consider your options: Can you use new technology to reduce your workforce needs? Can you reduce your customer service levels without losing customers? In a typical head count reduction initiative, the organization ends up doing the same amount of work with fewer people – without fundamentally changing the work itself. It’s like cutting a pizza into eight slices or 16; it’s still the same pizza, it’s just cut differently. Giving more work to fewer people isn’t sustainable.
  • Redesign the structure. Similarly, reducing levels of management or increasing spans of control also needs to be aligned with strategy and structure to produce optimal results. A great deal of energy can be expended in flattening the hierarchy, but that might not make the organization more effective.
  • Make the right choices. Success or failure comes down to how you decide to start cutting costs. The leaders making the decisions need to understand the business clearly to avoid introducing changes that do not make sense. The work is still there: in fact, as you continue to grow, there will be more work than there is today. You need to make optimal decisions about better ways to get the work done.
  • Be sensitive to the people issues. Empathetic cultures acknowledge the human toll of lost jobs and prefer to reciprocate the loyalty of employees who have helped the organization grow. Managers need to find ways to be constructive about achieving the desired financial outcomes while operating within their organizational culture.  

Reducing costs affects all the sides of the organizational cube. Failing to realign strategy, work, structure, and the other aspects of the organization undercuts the objectives of cost-cutting efforts. Making strategic cuts with a comprehensive view of the organization will improve the odds of success.

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.