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January 30, 2008	Volume 8, Issue 5
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The True Costs of Cost-Cutting

by Rick Brenner

The metaphor "trimming the fat" rests on the belief that some parts of the organization are expendable, and we can remove them with little impact on the remainder. Ah, if only things actually worked that way...

hen organizations cut costs, decision makers often assume that the parts of the organizations that remain unchanged continue to produce at pre-reduction levels. They rarely do. For example, downsizing the Purchasing function can have ripple effects throughout the organization. And canceling one project can actually affect other projects even if they don't depend on the canceled project.

A recently reclaimed property near Buffalo, New York

A recently reclaimed, formerly vacant, property near Buffalo, New York. Offshoring and outsourcing tend to produce local surplus property, which often remains unused for extended periods. Reductions have fairly obvious effects on the organizations that undergo the reductions, but even thriving neighbors can feel the effects. Vacant or abandoned properties surrounding the facilities of otherwise healthy firms can be depressing to look at, and the long-term effects of such sights can depress productivity. When these effects are considered, it can make economic sense for healthy firms in such circumstances to develop neighboring properties, lest those healthy firms themselves become less healthy. Photo courtesy National Vacant Properties Campaign.

Fundamentally, organizations are systems. Moreover, they don't "factorize" easily — their parts are interconnected in ways that are outside our awareness. These interconnections sometimes propagate the effects of cost cutting. We tend not to notice these channels, in part, because they don't correspond to connections in the org chart or line items in the Chart of Accounts.

The effects of cost cutting tend to propagate along personal lines — the relationships between people, and the perceptions and emotions of everyone in the organization, including the people who we believe ought to be "unaffected" by the changes.

Here are some examples of how the effects of cost cutting propagate. If your job entails estimating how much time or effort tasks require, and if your organization is in the midst of reductions, you'll do a little better if you take these effects into account.

Personal network disruption: Waves of reductions in force tend to disrupt the networks people use to find out how to do things — how to prepare requisitions, which procedures to follow, or where to find the answers to burning questions. Relocations and site consolidations have similar effects.
Change-driven chaos The effects of cost cutting tend to propagate along personal lines — perceptions, emotions and the relationships between people: The entire organization can descend into change-driven chaos. People become distracted and performance degrades, especially when procedures and job responsibilities change rapidly. Many begin working for new supervisors, with whom they must establish new relationships. Some find themselves working for supervisors with whom they might have unpleasant history.
Termination-induced grief: When groups of friends are separated because some have been terminated, the survivors enter a period of grieving, sometimes called "survivor's guilt." Their productivity can degrade significantly.
Voluntary turnover: When things get sour, people begin to fear they will be targeted next. Those with alternatives elsewhere (usually the most talented) start job searches preemptively. Vesting schedules for stock options, profit sharing, and pension plans lose their ability to hold people, because of skepticism about the value of the underlying benefit.
The what's-the-point effect: People who notice ways to reduce costs, and people who would otherwise either contribute innovations or prevent catastrophes, start to ask, "What's the point?" They begin to feel that they won't be rewarded for their trouble, or that they might be terminated before being rewarded with the next merit pay increases, which have often been suspended anyway.

If you're weighing a decision to cut costs, estimating the full impact of these effects might improve the quality of your decision. And remember that personal network disruption, chaos, survivor's guilt, and the rest, might affect you, too. When that happens, it can degrade your ability to notice these effects. Is it already happening? Top Next Issue

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When we talk, listen, send or read emails, read or write memos, or when we leave or listen to voice mail messages, we're communicating person-to-person. And whenever we communicate person-to-person, we risk being misunderstood, offending others, feeling hurt, and being confused. There are so many ways for things to go wrong that we could never learn how to fix all the problems. A more effective approach avoids problems altogether, or at least minimizes their occurrence. In this very interactive program you'll learn a model of inter-personal communications that can help you stay out of the ditch. In those moments of intense involvement, when we're most likely to slip, you'll have a new tool to use to keep things constructive. Read more about this program. Here's an upcoming date for this program:

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Have you ever felt powerless to implement an important new idea? Have you ever been "blind-sided" at a meeting? Have you ever lost two good employees because you could find no way to keep them from attacking each other? These are some of the issues of organizational politics. Many of us have become enmeshed in them from time to time, but we've also known some people who seem to be able to engage and prosper. How is that done? We'll inventory the challenges of organizational politics, and provide tools for anticipating and addressing them. The focus of this program is practical — attendees learn concrete techniques for dealing with the problems that arise in workplace politics, while keeping their integrity intact. Read more about this program. Here are some upcoming dates for this program:

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There's a lot more to running an effective meeting than having the right room, the right equipment, and the right people. With meetings, the whole really is more than the sum of its parts. How the parts interact with each other and with external elements is as important as the parts themselves. And those interactions are the essence of politics for meetings. This program explores techniques for leading meetings that are based on understanding political interactions, and using that knowledge effectively to meet organizational goals. Read more about this program. Here's an upcoming date for this program:

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Contact Information

Download vCardRichard Brenner
Chaco Canyon Consulting
700 Huron Avenue, Suite 11J
Cambridge MA, 02138

Phone: (617) 491-6289
Toll-free: (866) 378-5470 in the continental US
Fax: (617) 395-2628
Email: rbrenner@ChacoCanyon.com

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