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Bang for the
Bucks in an Environment of Cost Containment:
What You Do Spend (as Well as What You Don’t)
Determines If Your Company Will Be Around When the Economy
Rebounds
The word is in from 60
industry leaders—your peers in several industries—who
responded to our emailed question about how to budget for cost
containment during downturns. Our respondents included CEOs of
publicly held companies, VPs of Sales and Finance, senior
management in Human Resources and Organizational Development—as
well as top professionals in a wide array of disciplines and
industries.
There were consistent themes in
what they had to tell us. And some of it is surprising.
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K. Jack
Speer,
President
The Delta Associates
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Clarke Hammond
City of
Austin Administration and Finance Manager, Demonstrates His Cost Cutting
Techniques
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Gross
Domestic Product Crashes
Growth in GDP
Why the frenzied cost-cutting? Look at the tanking GDP
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TWO MAJOR ANSWERS TO THE
PUZZLE OF COST CONTAINMENT
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The answer comes in two parts:
Answer One:
You have to cut expenses in places where a year ago you would have
said it was impossible. But sometimes you have to throw the china and
linens over the rail to save the ship and its passengers.
Answer Two:
If you cut in the wrong areas, you’ll breach the hull of the ship
and you and the ship will sink.
So now that you have to cut the baby in
half without killing or maiming it, just how do you perform such a
miracle?
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John Schofield
President and CEO
of Advanced Fibre
Communications
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- In a cost containment
environment, rational and collaborative wins over emotion. You
have to be (1) long on rationally achieving the lowest possible
bottom-line number, (2) as short as possible on unilateral
cost-cutting decisions, and (3) even shorter on fear, the most
subtle and difficult dynamic of cost-containment budgeting. Get
everyone involved both mentally and emotionally.
You still have to look at things on a case-by case basis. You
have to listen to people when they make a case for expenditures
because when final "no’s" are always final, your people
will stop thinking—and that’s far more dangerous than a
downturn. We heard from professionals and senior managers in
companies where whole categories of expenditures are totally
prohibited—no exceptions. Yet there always should be exceptions.
Maybe that sales trip to Tahiti really will produce an easy sale—probably
not, but you have to listen.
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I know of several organizations where VPs and directors won’t
speak out for items that are critical to the business, because they
don’t want to get tagged with spending money, even if it makes
sense. A general fear permeates the organization that forbids
spending to be mentioned.
- Spend scarce dollars close to the
customer. Ask yourself, are
we spending our money as close to the customer as possible? John
Schofield, President and CEO of Advanced Fibre Communications
says, "I would tend to approve only those things that are
customer-facing such as sales, marketing, and customer
service." Those who lead corporations during this downturn tend
to agree, and we have not seen the wholesale gutting of marketing
and sales that took place in the 80s.
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Beth Slifer
President, Slifer Designs
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Cory Walton, Senior Communications Specialist for
Fisher-Rosemount Systems makes a key point for companies today:
"Marketing has become inextricably intertwined with companies’
product-to-market architecture." Unlike earlier downturns,
today Marketing is not seen as a deep pool of discretionary budget
items. In earlier downturns, leadership tended to understand making
the product more than moving it. Today’s senior management and
CFOs realize that the big hickey from inventory write-offs can be
due to muzzling sales’ ability to move.
- Sales and sales strategy is king of
the walk in this downturn. A VP
of Finance & Controller for a major tech company says, "The sales function drives the business, everything else is
'support'. So in any type of slowdown or downturn, our
cost containment strategy involves cutting everything besides sales
first." Beth Slifer, President of Slifer Designs, a
high-end interior design company in the Vail Valley of Colorado
observed, "We had a wake up call the first quarter which was
down 20% from budget. We had to cut costs and accelerate marketing.
Six weeks later, we were even in two divisions and up 20% in the
third."
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In a period of strategic inflection, to use Andy Groves’
now-famous term, we have to do more than just do what we have been
doing, only harder. The economies of scale are significantly--if not
totally--different, and we have to instantly move toward new
markets, applying products and services differently, and working on
pricing and our value proposition.
Sales are now carefully targeted rifle shots, rather than the
"aim at everything that flies and claim everything that
falls" model. According to Phil Soro, Sales Manager of
the Immunex Corporation (pharmaceuticals), "we have to know
what the goal of the account is." It’s not just getting out
there and creating awareness, it’s converting a key physician to
support our product," or other key people within the
organization who can lead us to the sale.
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Bill Gardner
Director
Advanced Micro
Devices
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- Develop a rational model for expenditures based on your mission
and values and business strategy. Chipmaker AMD charts the use of
their expenditures through their vision and values, according to Bill
Gardner, director of Corporate Growth and Development at AMD.
Gardner uses a rational model for determining which
expenditures he will approve: If an item has high alignment with
values and strategies and high bang for the bucks, then fund it—including
sticking your neck out to defend it. If it has high alignment, but
low bang, wait until you can do it under the form of organization
that will support the function. If it has low alignment and low
bang, reject it. If it has low alignment, but high bang (great
intrinsic value), consider it later.
- Keep your best talent—it’s not
as easy as it sounds!
"In the downturn of the 80s," says Carol Kallendorf,
Ph.D., "there was a certain glee in mass layoffs. It was
macho and impressed investors and industry watchers. It has produced
a whole generation of employees who don’t wait around for the ax—they
bolt.
Decide who you want to keep and do what
it takes in compensation and development to keep them!" Kim Wolfe, Director of Human Resources at Slifer
Design puts it this way: "The trick is keeping people motivated
if things don’t turn around quickly—you’ve got to celebrate
even the little steps forward."
- Do the work of balancing difficult conflicting interests. Murray
MacFarlane, Founder of Nascent Consulting Services, of Toronto, Canada, makes the important point that during a downturn you have a tough balancing act. "I always start with an understanding that there are three major stakeholders in the
workplace—with interdependent relationships: investors, customers, and employees." The question is, "How does
a company get the best return on investment, interrelating these
sometimes conflicting interests?" The bottom line rules with
investors—especially in downturns—but if you lose forward momentum in R&D and your best talent is gone or traumatized, strictly managing from a cash perspective will ruin a company as quickly as a bad balance sheet. In budgeting for
cost containment you must set percentages for R&D and employee development,
even if it becomes part of your long or short term debt structure.
- Communicate what’s really
happening to your employees.
If you don’t talk to them eye to eye, they’ll assume the worst.
If you can create the "we’re all in this together"
spirit, your employees will respond. Communication is the key. One
department head of a large corporation, who prefers not to be
identified, says that management doesn’t come out of their offices
during downturns, and employees don’t know anything about what’s
going on. The wiser course is to share good news and
bad.
- You have time now—reinvent your
organization, work on
infrastructure and long-term planning. Were you ever running so hard
that the day you were having a party at your house you realized that
it looked like a natural disaster--and so did you? That’s what’s happened in
business. The downturn in the economy is not just about bad numbers—it’s
about sloppy work and ragged processes. Many respondents to our
email said they are continuing to invest in technology—as long
as it increases productivity, improves service to the customer, or
helps them build a better product or get their message out to
customers more efficiently.
Invent products and services a client customer will write a check
for even when cash is lean. Today we have companies that years ago
brought us essential tools for productivity and are now trying to
sell us personal digital assistants and games, rehashed office
software, and niceties no senior manager with a brain would buy.
During the decade of the nineties we didn’t have the time to
restructure, reorganize, invent, and improve. Now we have to
reinvent our businesses and ourselves to survive. It’s painful,
but exhilarating! This "unwelcome opportunity" will
totally change both our businesses and us.
- Short-term will reign in spite of
wise declarations to the contrary, but ignoring long term strategy
will run you off the cliff.
Legendary CEO Jack Flack said from the 80s downturn,
"Our mission statement is, ‘Don’t run out of cash!’"
One of the key ways to turn the downturn around is to go gain the
confidence of the investor and you can’t do that by missing the
analysts’ expectations. We won’t emerge from the downturn with
depleted cash reserves and choking debt.
Nonetheless, in the midst of surviving
waves of unexpected immediate financial challenges, do something
strategic every day that will enable you to use the downturn. Position
yourself with the right sales force, product and service mix, and
general business strategy to leap frog over the rest as soon as the
economy gets better. While others see only red ink, look for a way to
move forward.
For a partial list of those who contributed to this article,
click
here.
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