Stop firing your best assets

INSTANCES of corporate giants opting to restructure for the good of the financial bottom line have been dominating the headlines recently. The likes of Kelloggs, HP and Barclays have all announced plans to make significant workforce reductions in pursuit of improved business performance.

There is more than a touch of Shakespearean tragedy about some of these stories. And to paraphrase King Lear, “that way madness lies”. For what if cutbacks to the workforce could be avoided? What if there was another, more sophisticated approach that could save both money and jobs at the same time?

Blue sky thinking? Or an impossible pipedream? According to a global study of 2,000 publicly traded companies it turns out that things have changed quite a bit.

Business is an extremely different landscape today. Labour costs have fallen to just 12.5% of expenditure while non-labour costs account for up to 70%. Yet companies appear to have lost control over those who provide the outsourced elements of their business, such as IT, finance, logistics and marketing. If corporate leaders need to be making sure that every penny a company spends works hard to achieve their business goals, this is disturbing news indeed. Performance can only be improved by understanding non-core costs to enable change. But all too often this just isn’t happening.

The study ‘Corporate Virtualization – cost externalization and its implications on profitability’ of FTSE 350 companies found that a 1% reduction in non-labour costs would result in a 3.6% EBITDA lift, while a similar labour cost reduction would only offer a 0.8% increase. That’s pretty compelling evidence. Taken together, the results strongly suggest that efficient management of non-labour costs will have a much more pronounced and positive impact on revenue and profitability than frequently knee-jerk headcount reductions.

Clearly, businesses need to look deep within themselves to avoid the traditional, inherited thinking of the past that employee redundancies have the most impact on cost savings. The knock-on negative effects of this false understanding are only compounded by the damaging effect that job cuts have on employee morale and retention rates. Indeed one company which saw at firsthand the damage that cuts cause is Kelloggs, where the company’s quality control weakened as a direct result of too many job cuts, leading to product recalls.

I frequently meet companies that spend months pouring resources into expensive research and reports and then opt for employee cutbacks as the most efficient way to tighten up their business operations. My advice to them, and any others feeling the urge to restructure, is to step back and think again. Focus on your suppliers. Allow them to contribute actively to your organisation’s long-term goals.

Our CEO Matthew Eatough often quotes Einstein’s definition of insanity: doing the same thing over and over again and expecting different results. Business theory doesn’t need to reach the heights of theoretical physics, but the evidence of our research clearly shows that a new approach to managing costs is not only possible but necessary. 

Guy Strafford is the chief client officer at Proxima