Insight - Deep cuts bleed you dry

Suddenly cutting costs is back on the agenda. But how many FDs remember how to make cuts? The last recession saw companies losing swathes of staff and whole divisions. Now the financial pages are again packed with tales of companies making mass redundancies and quitting markets.

However, companies need to be careful not to repeat the mistakes of a decade ago, when stringent economies cut into core businesses, making it harder to seize opportunities when the green shoots of recovery appeared. But the omens aren’t good.

Mary Cockroft, managing director of Pagoda Consulting, has been there before. She founded her own company just before the last recession struck.

“We had to revamp all our services,” she says. “We learnt a lot about the interesting behaviours people adopt in a recession.”

Cockroft worked on a project that helped BT slash staff in one division from 10,000 to 1,000. “The first thing you have to do is identify core activities,” she says. “Most people think in terms of operational functions and support services, but it isn’t always as simple as that.”

The problem, says Cockroft, is that people are performing non-core work all over the company, even in departments which look as though they are at the heart of the business. So cutting should not be about lopping off whole departments or divisions. It’s more a case of keyhole surgery – winkling out the non-core activities, wherever they are.

Sometimes large cuts are painful. When a divisional MD was ordered to cut his costs by 50%, his first reaction was that the board had adopted a negotiating ploy. They hadn’t – and rejected his offer of 20% cuts.

Cockroft recalls facilitating a series of “increasingly brisk” meetings between the MD and his boss. In the end, the MD was told that if he didn’t produce the cuts, he wouldn’t have a job. “He had to look at his business in a new way,” she says. “He had four main product lines and decided one of them was responsible for 30% of costs and wasn’t making an adequate return – so he stopped it.”

But in most cases, companies should seek to avoid such radical surgery as they make cost reductions, says Mike Freedman, head of the strategy consulting practice at global consultant Kepner Tregoe.

“Too many companies cut back in a way which is short-term and counter-productive,” he says. “The slash-and-burn mentality frequently cuts into the muscle, so you lose a lot of your core capabilities. Smart firms examine their strategy. If it’s still right, they then decide what they must continue to do while still making productivity gains.”

Freedman believes the way companies scaled back on geographical and new market penetration in the last recession did more damage than the economic conditions. “It’s a mentality we’re already seeing in this downturn. You only have to pick up a newspaper to read cases every day,” he says.

The case of the international finance house which laid off nearly 1,000 staff, then re-hired most of them as consultants or contractors is a good example. “It means they’re no longer shown as overheads in the accounts but the company has done nothing to improve productivity or better serve its customers,” he says.

Freedman believes FDs should resist pressure to please shareholders with short-term cuts which undermine long-term strategy. “In my view, the board of directors is abrogating its strategic responsibilities if it lets either the analysts or shareholders dictate the strategy of the company,” he says. “It’s short-termism if, every time an analyst sends out a bad report or a major shareholder sells shares, there is knee-jerk cost-cutting.”

Of course, this is easy enough to say. It’s much harder to hold the line in the face of such pressures. But finance directors simply have to try harder this time around.