Three Rounds To Cut Costs: Basic Economics


Whether caused by a downturn in the economy or the need to turn around a troubled company, the single most pressing demand on managers is to get costs out quickly. Consider the division manager of an information systems unit of a troubled company. A new CEO has the mandate from the board of directors to cut costs quickly and turn losses into profits. The division manager receives an e-mail that directs him to cut 20 percent of his annual employment costs of $79.75 million—a total of $15.95 million.

The division manager ponders, “How am I going to cut these costs? Where do I start? What will do the least damage?” His first thought is to initiate layoffs. “Some people (maybe 200 of our division of 1000, or 20 percent) will have to go,” he thinks. “Maybe it doesn’t have to be 20 percent of the people. Maybe there are some costs I can cut without having to lay off people. How much money are we spending on perquisites, I wonder? Those could be easily cut and they won’t cost me talent. But I’m still going to have to cut people. Maybe I can find the highest paid people to let go. That way I can get 20 percent of the cost out with fewer layoffs. But they probably are the ones I can least afford to let go.”

The manager’s thoughts speak volumes about the economic considerations confronting any leader who has to reduce operating costs. But they are knee-jerk reactions. They don’t follow an organized game plan. To act intelligently and in the best interests of the company, leaders in a crisis need to consider the costs that must be reduced and the strategies to accomplish the cuts. The headcount solution calls for a cost-cutting strategy that consists of three rounds:

Round 1 : Across-the-board cost cuts. Cutting costs without laying off people.

Round 2 : Alternative work arrangements. Finding alternatives to traditional employment that will allow the company to cut compensation costs yet hold onto the mission-critical talent the company needs.

Round 3 : Layoffs. If costs remain to be cut after Rounds 1 and 2, laying off those employees necessary to achieve the cost-cutting requirement. Layoffs at this stage are typically smaller than would have been necessary if the company had done across-the-board layoffs as the first strategy.

The manager in this scenario must reconsider what to do after each round of cost cutting.




The Headcount Solution. How to Cut Compensation Costs and Keep Your Best People
The Headcount Solution : How to Cut Compensation Costs and Keep Your Best People
ISBN: 0071402993
EAN: 2147483647
Year: 2002
Pages: 143

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