Crisis mgt 2 | Claverton Consulting

Crisis Mgt 2

Crisis Management 2 – Downsize or Capsize?

Coming out of a crisis, the immediate reaction of many leadership teams is to seek cost savings. When revenues are under pressure, costs must fall in line. Often this is done with our short-term hats on, in other words, we take a red pen to this year’s numbers to ensure that we hit our immediate performance targets. Often, there is a perceived need for speed – achieving the cost savings must happen by next month otherwise we will miss our targets!

Typical cost cutting areas

It is fair to say that there is no silver bullet when it comes to fulfilling a demand to cut costs. If there were, the chances are that you would have done it already. Therefore, a mix of actions (see Claverton’s Cost Savings Initiatives Model opposite, which shows the cumulative impact of our approach to this topic) will be required:

Low-hanging fruit: there is likely be fat in existing budgets from prior budgeting and forecasting cycles and this low-hanging fruit offers a straightforward way to clawback cost

Discretionary spend: items such as staff training, non-essential travel and internal events can be classed as discretionary and therefore are easily deferred or cut in the short term

People costs:
- leaving vacancies unfilled (and challenging mangers on whether they really need those roles) is a simple way to run under budget, as is holding back on pay increases and bonuses. Roles may relate to upcoming projects which will be deferred as a result of the financial pressure, so they can be reassessed alongside the projects at a later date
- direct staff costs always come under scrutiny, with furlough schemes, contract or agency staff termination and redundancies often bearing the brunt in order to preserve profitability

Investment project portfolio: change is a constant in every business, but it is complex and costly. Stopping or mothballing certain projects may defer the business performance step change you seek but will keep the lights on until you can restart them

The major risk is that you cut in the wrong areas and damage medium-term business performance, therefore you must always seek protect core business activities. One size does not fit all – uniformly cutting across all departments fails to protect strategic imperatives and, whilst it is tempting to treat everyone equally, the reality is that different areas of the business afford separate and distinct opportunities.

There is an art to successful cost-cutting and short-term downsizing, looking at the effect of the numbers on your business rather than the numbers themselves. The ultimate goal for anyone tasked with delivering a significant transformational change programme is to find that sweet spot whereby all achievable benefits are realised without undue impact on the smooth and profitable running on the business, now and into the medium term.

The Downsides of Cost-Cutting

When short-term cuts are necessary, achieving them without due consideration of the impacts on the wider business can result in significant downsides, such as:

Organisational disruption: as well as diverting managers from the day job to look at cost saving opportunities, the cuts themselves may result in the upheaval of performance metrics, people, business processes and so on. The most effective organisations treat cutbacks as a mini-project and carve out a small, specialist, cross-business team to draw up a picture of the change impacts resulting from cutbacks, including the opportunities it creates

Investment disruption: cutbacks disrupt valuable initiatives designed to make structural, transformative improvements to products, customer propositions, business operations and so on, deferring or delaying the benefits of those initiatives. Some of these initiatives may be central to the performance of your business and must be ring-fenced from cuts – doing so early in the cutback process, and clearly communicating that, is imperative

Failing commitments: if you must cut back severely, especially where headcount reductions are required, it is extremely difficult to deliver business outcomes as you originally envisaged. Teams will have to go into expectation management overdrive and executive managers will have to decide which commitments to let slide versus those which must be retained

Missed opportunities: crises can create opportunities to improve processes and systems. However, one adverse consequence of headcount reduction is that you lose the very people who could have helped you realise those opportunities. Whilst this may be unavoidable, recognising where opportunities exist is valuable when it comes to future reinvestment

Professional development: when training costs are pared back it is only natural that staff development will remain static. In the short-term, the impact of this is probably minimal, however it is imperative to check that the deferral of skills acquisition will not hamper key initiatives. There is also a potential impact on staff morale and loyalty

Unexpected dependencies: the unforeseen consequences of cuts are the most common cause of surprises for executive managers. Where cuts are made to central budget pots, e.g. project, departmental services and so on, they can often result in consequential impacts outside the directly affected function. Without comprehensive evaluation and impact analysis, it may be necessary to correct the situation by reinstating cost in order to manage the fall-out – all too often the cost of correction is higher than the budget originally required

Surprises: the only thing you can be certain of after completing a cost-savings initiative is that there will be surprises. Some of these we have touched on above, but there are many more examples of unexpected consequences resulting from a funding squeeze. In the rush to cut costs people often forget the cascade of impacts into the next financial year and the overall impact this may have on the resilience of their business

As you can imagine, the compound impacts of cutbacks carry with them the risk that if you go too far, you’ll capsize your business rather than downsize it. On reflection, many of us would probably admit that as a result of a cost reduction programme we have created surprises that didn’t come to light until several months later, leaving us with an unexpected bill to recover the situation.

The Upsides of Short-Term Downsizing

The good news is that a strong cutback team, running a thorough process will deliver a suite of positive outcomes from a cost-savings initiative. The model opposite has been developed by Claverton to help you formulate a rapid, effective cost reduction exercise. It includes:

Savings Targets Achieved: in a way which demonstrates the change impacts on your business, empowering you to manage the consequences and prepare for future growth, leading to………

Sustainable Savings: the identification of sustainable savings as well as those which are just there for the short-term. Clearly classifying and banking permanent savings will buy you budget flexibility when the time comes to reinvest

Improvement Opportunities: will be identified for future enhancements, projects and the like, particularly where you utilise external expertise as a component of your cutback team. Other opportunities to stop unnecessary activities or projects may come to light during a review, resulting in greater savings

A Business Impact Analysis: starts with up-front ring-fencing of out of scope items, which immediately prevents your entire business from being disrupted during the cost rationalisation and protects strategic imperatives. It will examine the impact of cuts on the bottom line, service levels and performance metrics and feed conclusions into a risk analysis and the subsequent reinvestment plan

A Reinvestment Plan: looking forwards through the impacts of cost reduction to the future point of reinvestment is a really powerful way of validating your project:
- It provides a broad-brush assessment with regard to the likely costs and timescales for reinvestment and analyses the future business impact
- It validates each cost reduction category, providing confidence that you are cutting the right things in the right ways and not creating a huge problem in the medium-term
- It motivates people by articulating the path out of cost saving towards reinvestment and growth

How Can I Downsize Effectively?

When we apply Claverton’s Cost Rationalisation Model, we evaluate the risk and impact associated with particular cost categories. Certain categories, departments or processes can absorb cuts with little or no impact or risk; others require a rapid-fire risk review to evaluate the impacts and a considered decision.

With that in mind, the following list contains several areas you can look to if you must save money quickly:

Stop non-value added activities: nothing saves money like stopping activities that you needn’t be doing, and removing the costs of managing and coordinating them

Closely examine overheads: in this increasingly digital world, should you still have huge stationery and phone costs, for example?

Carpe Diem: seize the opportunity to realise savings that have been long thought of but remain unrealised, such as low cost labour locations, embedded costs of ways of working that still exist because they’ve always been done that way

Understand cross-department cost drivers: how a process is executed may cost your internal customers or suppliers cash they wouldn’t need to spend if you just changed something simple

Relax service levels: commonly, that last couple of percentage points on a service level are super-expensive to achieve, so relax them for a while – particularly if they are purely internal

Eradicate exception handling: process standardisation can drive out cost simply by refusing to accept exceptions and engineering them out. Our clients are continuously amazed how exceptions can build up unchecked over time because there’s always something more important that needs their attention

Automation: increasing automation (with appropriate oversight and control) is a great way to take out cost. It might take a little longer than a red pen cut to a budget, but it will be sustainable

Reduce contingency: where you have resilience engineered into budgets, remove some of it. However, do so with a view of the heightened level of business risk this implies and be prepared to spend extra time in risk mitigation and to deal with surprises should they arise

Develop staff internally: ramp up those mentoring programmes, spread them more widely so that more people are covered by fewer executive mentors, and reduce that short-term training budget

As a final thought, when cutting head count you need to accompany it by taking out activity and consciously accept shortfalls in production, service or delivery for the period over which the cuts apply. Furthermore, you need to be clear what the cost of returning to a ‘normal’ level of business activity will entail as it may cost you considerably more in the long run. This suggests the need to relax non-financial measures of performance and factor adjustments into people’s performance objectives, to achieve certain financial performance metrics.

Conclusion

If the medium-term costs outweigh the short-term benefits you need to think seriously about whether you are fundamentally damaging your business. Many organisations simply do not know if they have done this at the end of a cost reduction initiative – using Claverton’s Cost Rationalisation Model will enable you to produce a Business Impact Analysis alongside a Reinvestment Plan to help you avoid this situation.

In our experience, the optimal way to approach cost reduction is to form a dedicated mini-project team, comprised of both internal and external experts, running the initiative using project management disciplines. This approach minimises the impact on day-to-day managers, allowing them to get on with preparing for the likely consequences of cutbacks as well as looking to the future to define their path out of lockdown.

To find out more, contact Claverton today at info@clavertonconsulting.com or 0117 325 7890.

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