Cost Cutting Should be Strategy Driven

“Here I am—most unwelcome, I know. Against my own will, too, since no one loves a messenger who brings with him bad news.” Sophocles’ play Antigone expresses well the distaste of delivering bad news. It’s one of the toughest parts of being a leader. And often the bad news is that costs must be cut.

Cutting costs can simply mean employees will have fewer frills and comforts. Or it can mean that people lose their jobs. It is a daunting task to inform employees that there need to be budget reductions and the effect on morale can be painful.

Many leaders try to soften the impact by making the cuts uniform. There is something egalitarian about across the board cuts that appeals to people. It seems fairer, lessens the outrage. If some departments are going to hurt, all departments are going to hurt. Everyone takes a share and this lowers the percentage that needs to be cut from each group. This also considerably reduces negotiating, which can get exhausting for a leader.

But there are serious problems with across the board cuts. Budget cuts are only worth their pain if they make organizations more competitive long-term. Cutting costs now preserves the organization—and its jobs—in the future.

This makes cost cutting worth the pain. But when we cut uniformly, we are completely divorced from strategy, from competitive advantage, and from our customers. There are some department cuts that customers will never feel. There are other department cuts that customers will feel instantly. And they will take their business elsewhere. Also, budgets aren’t necessarily proportional. Some departments may already have excessive budgets for the value they provide, while others may truly be needing more investment despite the overall reductions because what they do has a direct impact on the value customers want.

Cost cutting should be strategy-driven, not a blanket approach. Just as strategy is a clear set of choices to offer a differentiated approach in the marketplace, budget reductions should be a clear set of choices aligned with this desired differentiation. Cuts should be decided by looking carefully at the impact of different choices. When an organization is struggling, that is not the time to make timid, egalitarian cuts. That is not the time to cut talent or capabilities that are desperately needed in the guise of treating every group the same. Like a parent, leaders need the courage to teach their group that fair doesn’t always mean the same. Cuts need to be deliberate and carefully designed to be worth their pain—creating a healthier, more competitive organization for the long-term.