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 after the cuts can 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.

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.

Unexpected propagation happens because the effects of cost cutting tend to travel not along formal lines, but along personal lines — that is, 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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More articles on Organizational Change:

Look Before You Leap

When we execute complex organizational change, we sometimes create disasters. It's ironic that even in companies that test their products thoroughly, we rarely test organizational changes before we "roll them out." We need systematic methods for discovering problems before we execute change efforts. One approach that works well is the simulation.

Change How You Change

In the past two years, your life has probably changed. Do you commute over the same route you did two years ago? Same transportation? Same job? Same company? Same industry? Change is all around, and you're probably pretty skilled at it. You can become even more skilled if you change how you change.

Conventional Foolishness

Every specialization has a set of beliefs, often called "conventional wisdom." When these beliefs are so obvious that they're unquestioned and even unnoticed, there's an opportunity to leap ahead of the pack — by questioning the conventional wisdom.

Plenty of Blame to Go Around

You may have heard the phrase "plenty of blame to go around," or maybe you've even used it yourself. Although it sometimes does bring an end to immediate finger pointing, it also validates blame as a general approach. Here's how to end the blaming by looking ahead.

On Beginnings

A new year has begun, and I'm contemplating beginnings. Beginnings can inspire, and sometimes lead to letdown when our hopes or expectations aren't met. How can we handle beginnings more powerfully?

See also Organizational Change and Project Management for more related articles.

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The Race to the South Pole: Ten Lessons for Project Managers

On 14 December 1911, four men led by Roald Amundsen reached the South Pole. Thirty-five days later, Robert F. Scott and four others followed. Amundsen had won the race to the pole. Amundsen's party returned to base on 26 January 1912. Scott's party perished. As historical drama, why this happened is interesting enough, but to project managers, the story is fascinating. Lessons abound. Read more about this program. Here's an upcoming date 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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