Or, Letting Suppliers Pay Some of Your Company’s Expenses

Cutting expenses is not as exciting as increasing gross revenues, but it is more effective in improving the bottom line.  If your company returns one dollar of profit for each ten dollars of revenue, you have to grow sales by $10 to gain $1 of profit. However, if you cut one dollar of expense, that one dollar is directly reflected as one more dollar of profit on your bottom line.

Studies have tracked the performance of downsizing firms versus non-downsizing firms for as long as nine years after a downsizing event. The findings: As a group, the downsizers do not outperform the non-downsizers. Companies that simply reduce headcounts, without making other changes, rarely achieve the long-term success they desire.[1]

During a poor economic environment, companies often first try to dramatically cut expenses by reducing personnel costs, typically by layoffs. While these steps may be necessary at times, they have many disadvantages.

This article looks, first, at some of the considerations in deciding whether to downsize; next, at some of the disadvantages of downsizing which may not have been considered; and finally, it suggests a more productive way to cut expenses.

Downsizing Considerations: if employment downsizing still makes sense after considering these issues, then your company may wish to proceed; if not, then you should consider other alternatives.

  • What is the real problem? Is it short-term cash flow, long-term decline in competitiveness, management overstaffing, worker overstaffing, lines of business that are no longer profitable or no longer fit the company’s business strategy, or something else?  Will merely cutting numbers solve that problem?  Will it solve any of them?
  • If so, How and Why? What are the short-term and long-term rationales, benefits, and detriments of downsizing for addressing each of the company’s problems? Will the company be able to serve its customers better, manage its finances better, innovate, retain its markets, open new markets, etc., after reducing the number of its employees?
  • Exactly what type of downsizing could be used to directly address each problem. For example, should you close one particular operating division or worksite, because of lack of customer demand for that product, excess capacity, obsolete facilities or equipment, difficulty in hiring competent workers in that area, local government regulation and taxes, etc.?
  • If the problem is short-term cash flow, are there alternative ways to cut costs? (We will discuss some options later in this article.) Such alternatives might include options such as cutting temporary staff, eliminating overtime, voluntary retirement offers, reducing work hours, freezing salaries and new hiring, temporary layoffs (furloughs), or reducing other expenses.
  • Would the potential layoffs include irreplaceable personnel or skill?  (To be very blunt about it, a “10% across-the-board” cut is undoubtedly the worst way to downsize–you are guaranteed to lose people you will want to re-hire when the economy recovers–but then, they won’t be available.)
  • If layoffs potentially include irreplaceable personnel or skills, how do you persuade them to stay?  Similarly, how will the downsizing affect non-laid-off high performers who would also be difficult to replace? Employee morale is the first casualty in a downsizing. Beyond that, high performers are always in demand, regardless of economic conditions. What will you do to retain them?
  • What are the short-term benefits from downsizing? What are the short-term costs? What are the long-term costs? How long will it take you to realize the benefits? When will the costs begin to eat into your profitability? Can you honestly quantify these benefits and costs properly or are you trying to compare present apples against future pomegranates?

Disadvantages to downsizing that you may not have quantified:
Studies have tracked the performance of downsizing firms versus non-downsizing firms for as long as nine years after a downsizing event. The findings: As a group, the downsizers do not outperform the non-downsizers. Companies that simply reduce headcounts, without making other changes, rarely achieve the long-term success they desire.

In addition to a smaller payroll, a downsized organization often results in the following problems:

  • Morale and Productivity/Efficiency: Many studies have found that morale, loyalty, and trust in management decline after a downsizing. So also does organizational commitment, job satisfaction, and job involvement. At the same time, stress levels, intentions to quit, and actual levels of voluntary turnover all increase.  Retained staff members are unsure as to the stability of their jobs and morale begins to drop; this drop in morale often develops into a loss of productivity and employee turnover.
  • Turnover: Layoffs reduce the morale, and thus the efficiency, of your workforce.  They also create uncertainty, which often causes your best performers to look for other employment. If you believe that your employees are grateful just to have a job and would never dream of leaving during a recession, you may be making a costly mistake. A 2008 study published by the University of Wisconsin–Madison found that downsizing can actually lead to a higher rate of turnover, which can leave organizations without the critical people they need to keep operating. Although they may not be actively looking, unhappy employees are usually open to new opportunities if they present themselves. An organization that lays off 10 percent of its workforce can expect to see a 15.5 percent rate of voluntary turnover among surviving employees, compared with a 10.4 percent turnover rate among companies with no layoffs.[ix] [ix] Trevor, C. O., & Nyberg, A. J. (2008). Keeping your headcount when all about you are losing theirs: Downsizing, voluntary turnover rates, and the moderating role of HR practices. Academy of Management Journal, 51, 259-276. Since the fully loaded costs of turnover (separation, replacement and training) can be 1.5 to 2.5 times the annual salary paid for the job, those additional costs can be huge.
  • Production Changes: Laying off employees during difficult times leaves a company ill-equipped to handle the future rebounding economy. Management should investigate options such as cutting wages or reducing benefits before downsizing employees because it affects the company’s ability to handle increases in production. Part of recovering from slow economic times is receiving a surge in customer orders. If your company is not properly staffed to handle new orders because of downsizing, then that limits your ability to execute a financial recovery.
  • Customer Service: If your company has fewer employees, then there are less people to take care of customer concerns. Your customer service levels will suffer and so will the public reputation of your company. Without adequate production staff, you may experience delays in shipping product to retail outlets. This will cause a rise in customer dissatisfaction that will have a negative effect on future sales and revenue.
  • Business Processes: One mistake a company can make is to downsize employees without altering the way the company does business. When there is less staff on hand to do the work, then the processes need to be changed to maintain productivity. For example, automation can be introduced to help do some of the jobs that staff members used to do in an attempt to maintain production levels with the existing employees.
  • Taxes, regulation, and other legal problems: Companies can expect to see increases in their unemployment tax or workman’s compensation rates in the year following downsizing; this will at least partially offset any savings realized from decreased employer contributions toward social security and Medicare taxes.  Companies may have worse dealings with regulators if long-term employees leave, taking their regulator relationship with them.  Any the company may be sued for improper termination on a number of grounds, for example, age, sex, or racial discrimination.
  • Direct costs: the direct costs of layoffs can be significant. Laying off highly paid technology workers in the United States, Europe and Japan results in direct costs of about $100,000 per worker. In 2008, for example, IBM spent $700 million in employee restructuring actions.
  • Indirect costs: the indirect costs may be even larger. For example, consider the opportunity costs of lost sales: if experienced sales and marketing representatives with strong client relationships are let go or leave out of concern that they will lose their jobs (particularly in multinational businesses, where relationships with customers and suppliers have to be nurtured over long periods of time in order to inspire enough trust to transact business), the opportunity costs of lost sales may be considerable.  Another example is cutting R&D personnel, which may leave the company with no new products in the future.
  • Long-term threats to the organization’s strategic success:  Such threats may take the form of loss of mission-critical skills, loss of institutional memory, inability to meet increases in demand as the economy recovers, and a sustained drop in innovation, as survivors become risk averse and focused only on saving their own jobs.
  • Brand-equity costs, or damage to the company’s brand as an employer of choice.  This can be particularly nasty if there are strikes or lawsuits associated with the downsizing.

Are There Other Alternatives?
There are some alternatives to downsizing. In the personnel area, for example, overtime can be eliminated or employees can be retrained or transferred to another division that is hiring. Full-time employees can be placed on part-time status. More generally, new markets can be developed or more cost-effective processes can be designed. Unfortunately, these responses require a long-range perspective and an immediate improvement in cash flow may not appear.

Reducing Telecom and IT Services Expenses: foremost among these alternatives to downsizing, we suggest that you also consider cutting other expenses–such as telecom and IT. Although telecommunications and IT services produce the kinds of efficiencies that businesses need to compete and profit, they also typically represent two of the top five largest expense categories a business incurs, and because of carrier tactics, these expenses continue to increase even in a declining economy.

Why reducing telecom expenses is difficult for companies: in other expense categories such as personnel or equipment, executives can typically visualize, manage, and track expenses quite efficiently.  They use the processes and expertise of their personnel to continuously bend the cost curve down in order to gain greater efficiencies and continuous improvement.  However, in telecom, it’s not quite the same.

In order to maximize its profits at the expense of its customers, telecom suppliers have developed tactics that make it almost impossible for the executives of companies to really understand and take control of their costs.  Pricing depends on secret discounts against published rates, and for inventory and service mixes that are only completely understood by the suppliers. As a result, the best competitive market pricing is completely obscured by suppliers. Further, suppliers invest heavily in building career-long relationships with influential employees who influence budget and technology decisions at its customer’s companies.  What this means, is that while its customer’s employees grow more and more dependent on the supplier to provide information, service and pricing, and guidance, at the same time, the competitive information that really demonstrates the true market pricing is obscured.

Due to these tactics, company executives generally find that expensive, frustratingly slow, and complex efforts to reduce telecom expenses yield only very modest savings.  To produce telecom savings, you need an outside expert.

What you can do to immediately reduce your telecom and IT expenses:

Get the most capable and qualified outside expert that specializes in reducing these expenses. When AIQ is hired to reduce a client’s telecom expenses, it 1) analyzes the client’s current telecommunication services, service providers, and costs to establish a baseline of what the client needs and desires; 2) projects potential cost savings available through auctions, optimization or repurposing or realignment of assets, audits, etc.; 3) conducts auctions and other proven processes as required. 4) Compels suppliers to competitively bid against each other to provide services to the client 5) Reports results by presenting the results of the auctions and other events to the client and, 6) based on the results, recommends services and service providers to obtain maximum reasonable savings to the client; 7) negotiates with the client-selected service providers to obtain executable contracts; 8) continues to interface with the selected service providers and reports to the client whether the contracts are being properly implemented; and 9) monitors billings, and reports to the client whether the contracted savings are being delivered by the service providers.

Through its process, AuctionIQ (AIQ) historically delivers over 50% Telecom and IT savings to the client, and depending on how fast the client can move, AuctionIQ can usually complete the project so the client can book the savings in the same quarter.  How much would that be in terms of your telecom spend?

So, this time when you’re looking at the budget and trying to balance it, instead of turning to reducing people expenses, look first to cut your telecom costs.