Cut costs, not heads: 5 strategies to prepare for the upturn

by 25 Jun 2009

Employees are often a company’s greatest cost. As HR managers are being asked to devise ways to cut the wage bill, Sarah O’Carroll investigates other ways to save costs and make cutting head count the last resort

In every recession HR departments find themselves faced with the difficult task of helping their com pany cut costs to save the business. And often, many of them opt to go down the redundancy route.

However, in studying the successes and failures of hun dreds of companies as they navigate downturns, numerous reports suggest that the long-term negative impact of cutting head count often outweighs the short-term savings.

Most executives will say that they understand the potential damage mass redundancies can inflict on both the firm’s reputation and the goodwill of their employ ees. However, ask those same executives what the best way to cut the wage bill is and many will still respond with the redundancy solution.

In a recent survey of HR directors conducted by Hewitt, 81 per cent of companies said they plan to fur ther cut costs this year even though they have already made significant reductions. Furthermore, 28 per cent say they are planning to do so by “restructuring” and 25 per cent are considering lay-offs.

Meanwhile, a recent Towers Perrin study of 600 HR executives found that while cost pressures remain intense, cutting too deeply into an organisation’s muscle – its talent – could seriously hamstring a fast return to growth.

As economists and reports have stated, we have entered this downturn very quickly and may come out of it equally as quickly. The Hewitt study showed that 54 per cent of HR directors believe the US’s economic upturn will begin at the end of this year or in early 2010 and most believe their own company’s economic improvement will coincide with that upturn.

So it seems that the logical solution for companies under economic pressure is not to buckle under the pres sure in the search for a quick fix, but rather be creative and innovative in looking for other cost-cutting strate gies that will keep the company not only alive, but strong for the upturn.

But what are the alternatives for HR departments who are faced with the challenge of cutting the wage bill? There are many other options companies can take that will either cut costs, or counter the need to cut costs by increasing productivity and performance.

Below are five cost-cutting strategies proffered by var ious HR directors, academics and survey findings, which will help companies avoid the dreaded redundancy road.

Strategy 1

Purchasable annual leave

PricewaterhouseCoopers (PWC) have had their “equi librium” program in place for the past four years. It was introduced as a flexible work arrangement whereby indi viduals could elect to work in a range of flexible ways. But, as the company felt the pressure of the downturn, they opted to offer additional purchasable annual leave for an extended period of seven months, until the end of January 2010.

The offer was made to 4500 employees and was com municated in a transparent way, so that each employee knew the reason for the offer – to avoid having to take the redundancy route.

The results of the offer were significant. Ninety per cent of the 4500 employees accepted the offer to take between 10 and 15 days unpaid leave.

“It was an amazing response,” says HR director of PWC, Nicole Brazil. “It really said a lot to us about the fabric of our organisation and that people know we are all in this together.”

Exactly how much money the strategy saved the com pany – and in turn how many jobs it saved – is difficult to quantify, says Brazil. However, with more than 4000 employees taking an extra 10 to 15 days unpaid leave it’s easy to say it would have a huge impact on overall savings.

Year on year, more people have elected to take up flex ible work options within PWC, but because economic con ditions forced the company to offer employees this extra annual leave it had more benefits than just saving money. According to Brazil, it gave some people the opportunity to do things they otherwise would not have done.

“This seven months program has given people the chance to stop and think about flexible work options,” she says.

Brazil also believes that this measure will be far more beneficial to the company than letting people go in preparation for when the economic pressure eases.

“Our people know that this will help to protect jobs, without a doubt, and they also know it’s temporary. This will help protect the fabric of our organisation to position us really well for when the upturn happens, which it will.”

Strategy 2

Job sharing

At the outset it might not seem like a cost- cutting strategy, but, according to Franco Gandolfi, director, MBA/EMBA programs and Professor of Management, Regent University in Virginia, US, job sharing can actually work as a means of saving cash.

If two people are doing the one job, in one sense there are the same costs involved because a company still has to pay the same salary for a particular role to be performed. However, according to Gandolfi, some companies in some indus tries in some countries may not provide benefits for part-time employees. So in that sense there is a cost saving to be had.

“In the US for instance, non full-time employees do not receive benefits. So although they may not save on the salary component, they will save on the benefit component which could be things such as health, dental, retirement, etc” he says.

Job sharing also leads to reduced absen teeism and increased productivity. Gandolfi says that one advantage of having two peo ple doing the one job is that when they work out a schedule to do certain hours they therefore have more time off work and tend to turn up for those scheduled hours, leading to decreased absenteeism.

The downside of job sharing, however, is the unpredictability for the customer, because often customers expect the per son they are dealing with to be there from 9 to 5, Monday to Friday. But, he says, overall the advantages outweigh the short comings of this arrangement.

“Job sharing tends to motivate people,” he says. “Loyalty is up, productivity is up, but where the customer is concerned it can be less predictable. However, overall the advantages over-ride the disadvantages.”

Strategy 3

Pay cuts and reduced hours

A recent Employee Insights Survey of 560 Australian professionals showed that nationally, 70 per cent would prefer to stay at their current employer and work reduced hours than face alternative cost- cutting strategies.

Surprisingly, taking redundancy was the next most popular choice – 16 per cent listed it as their preferred choice.

While reduced hours was the preferred method of cost-cutting across the board, interestingly, opinions differed across sec tors of specialisation. Those in the legal sector were the least adaptable to alter native strategies, with an overwhelming 100 per cent listing reduced working hours as their preferred initiative. Those working in the fields of general manage ment (85 per cent) and HR (83 per cent) appeared to follow this opinion.

Gandolfi says one of the most success ful strategies globally has been to cut both pay and hours. But the key to success when taking this strategy is to cut it across the board – by including every person in the organisation. The management must tell the employees what the situation is and explain the environment they are working in. They must explain that everybody is going to cut back in order to save jobs.

If pay cuts are not across all levels of the organisation, he says, it creates a level of cynicism and consternation among employees. People want to see that the situation is affect ing everybody – including senior executives – and that those strategies are a genuine and sincere attempt to save the company.

“What it comes down to is [that] people need to buy in,” says Gandolfi. “If you have employees buying in and they see what you’re doing and why you’re doing it and it has a good level and degree of fairness, then people will work with you.”

Strategy 4

Work with employees – not against them

Gandolfi also notes that, in a lot of cases, cost-cutting meas ures are driven from the top down and mandated from the board of directors. But he believes that sometimes it is bet ter to go to employees themselves and ask them how they think they could save money or increase productivity.

“The job incumbents themselves, each of them knows their own jobs themselves and each of them knows where there is corporate slack,” he says. “So if you can work on a system and involve the employees on eliminating slack – eliminating non-value-adding components of their work – it produces a lot of buy-in and goodwill.”

This is the approach that law firm Freehills has taken. According to HR director Gareth Bennett the impor tant part of the efficiency story is that it’s the smallest part of the story. The real trick, he says, is building goodwill and employee focus and the important part is the growth agenda.

“The differentiator between companies in times like this is getting out there and growing the business and seeking opportunities to expand and grow when every one else is hunkering down,” he says.

Bennett says that increasing performance by 1 per cent has a much greater impact than reducing employee costs by 10 per cent. It is for this reason he has focused on increasing performance under economic pressure.

“Look at our client base and see how we can work with them in innovative and creative ways,” he says. “We’re running a lot of courses to coach and educate our lawyers to show them how they can get out there and better help our clients and also exceed those require ments. A lot of our clients are going through a rough time and they, therefore, really appreciate that.”

The other big way in which HR can make a difference is through talent management, he says.

“HR can really make a difference by identifying who our best players are, who will bring us through this period and how can we help these employees, coach them, and position ourselves to ensure we keep them and mitigate the risks of them leaving.”

Because of the speed with which we entered this down turn, and the possibility that we may exit from it just as rapidly, says Bennett, if a company doesn’t have the right people in place to respond when the upturn comes, it will be in danger. Therefore, according to Bennett there are a lot of dangers involved in cutting costs too much.

“You need to be able to explode out of the box,” he says. “If you’re just cutting costs and cutting costs … when the upturn comes you don’t have the people or the structure in place to respond.”

“Everybody turns to cost cuts as a good way to go, or taking out numbers as a good way to go – but it’s got a huge cost in terms of brand damage and reputation and that’s one of the hardest thing to get back.

Bennett says the real solution is to work with your employees to be creative, innovative and cut out non- value-adding components of their work day.

“The idea is to work with your people rather than do things to them, so that they feel part of the solution rather than part of the problem.” says Bennett.

Strategy 5

Avoid layoffs – at all costs

Gandolfi, who has conducted extensive research on downsizing, right-sizing, lay-offs, and involuntary redun dancies, says that, in his mind, lay-offs must be avoided at all costs. He says it must be the very last resort.

“It has such a huge impact on the culture of a company,” he says. “People do not forget.

“It impacts their motivation and although produc tivity may not be impacted short-term, in the long-term loyalty gets affected, work satisfaction gets affected, innovation gets very much affected.

“You have all these negative aspects which sometimes are very difficult to quantify. You spend years and decades building a corporate culture and then a bump occurs in the economic cycle and managers jump straight to redundancies.”

He says, however, that lay-offs are not always wrong – and in the current case of General Motors for example, it would be impossible to avoid lay-offs.

But companies must look for a solution that is creative, he counsels, that will work in the short, medium and long-term and keep in mind that the eco nomic downturn is only temporary and will pick up again.

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