As companies tighten their belts in the economic downturn, Jon Katzenbach and Paul Bromfield look at why most cost reductions fail and how to motivate cost discipline across an organisation
Cost-cutting efforts continue. But one dimension of cost-cutting is often disregarded – the need to ensure it’s done in ways that obtain positive emotional commitment in the culture. Employees need to feel positively motivated to support decisions and commit to behavioural change that reduces costs. This is a tall order, especially when layoffs are at the centre of the cuts. However, cost-cutting and layoffs fail when executives simply try to mandate attitudes and behaviours.
These efforts are likely to succeed when leaders make positive motivation an integral part of the process. The first step is to ensure that front-line leaders’ actions appeal to employees’ hearts and minds. Positive motivation can’t be delegated or mandated. Effective cost reduction reinforces culture – and integrates the emotional commitment of the people with the strategic business imperatives.
Why most cost reductions fail
Under recessionary pressures, executives are grappling with cost-reduction programs with disappointing results. Few companies sustain cost reduction benefits after three years, often because the implementation is poorly managed. People don’t do what they are supposed to do. Why?
• Phantom savings prevail. Companies unwittingly slip into a suboptimal cycle of cost reduction that is both short-term and short-sighted. The cycle begins when managers launch an initiative to identify and implement cost reductions in different functions. But many of these cost savings are phantom – the organisation doesn’t sustain the savings once the initiative ends, and many of the savings are nothing more than deferred expenditures.
• Fundamentals are not addressed. Productivity does not improve, leadership systems are unchanged, and cost-accommodating behaviours persist. Hence, headcount savings in functions creep back in the form of higher expenditures with vendors, potentially impacting on SG&A or cost of goods sold. And, additional hiring occurs (often at higher cost) as “new” needs emerge. Leaders arguably won’t avoid these two pitfalls if they hastily cut costs.
Mandating versus motivating cost reduction
Leaders embarking on cost reduction should ask if quick cost reductions are all they want or need. If not, they should look honestly at the ultimate impact of any earlier cost-reduction efforts.
Important savings commitments may not have been implemented. Examples include purchasing commitments not followed, or new departments put in place to replace others that were downsized. Ask what happened, separating justified and unacceptable reasons for deviations. Avoid justifying past decisions. Learn from the last effort before launching a new cost-reduction initiative.
1. Mandating approach – firmness, discipline, and often fear. Leaders have two different approaches to consider: they can simply rely on mandating, or they can emphasise motivating. Mandaters believe that the cycle of suboptimal cost reduction can be broken through more firm resolve, discipline, and fear. Targets are set, the axe falls, and everyone follows through on the cost cuts. In many cases, executives call on experts or outside consultants to quantify opportunities for cost reductions and to complete the effort quickly, often using methods and analytics that are hard for many people to understand. Such efforts focus on the project and its science, rather than on the needs of the company and its people.
Despite well-intended top-down communications, employees suspect they are not getting the whole story. Firmness and discipline start to feel more like bullying as leaders push managers to “try harder” to enforce the cost reductions. Negative rumours circulate, insecurities build, and scepticism persists.
Senior leaders and line managers tend to rely too heavily on HR people to reduce anxieties, clarify top-down directives and help displaced employees find new jobs. The HR department works hard to ameliorate the anxiety that people feel. They put programs and processes in place to manage the cost-reduction effort, and they launch broad-based engagement efforts. Unfortunately, these efforts seldom address the culture disruption or obtain the help of front-line supervisors – the critical link to motivating employee behaviours. Part of the problem lies in lack of integration between leadership actions, frontline supervisory efforts, and formal HR programs. The informal elements of the organisation become confused, resentful, and counter-productive.
2. Positive motivational approach. At first glance, executives might dispute that they can motivate employees and managers in positive ways around cost-cutting. Indeed, no one should pretend that headcount reduction can be intrinsically motivating, and managers will still have difficult decisions to make.
The motivational approach to cost reduction involves employees committing emotionally to the cost challenge. Motivators look for ways to secure positive employee commitment – emotional as well as rational – to company decisions and behaviour change. A few companies have a culture that is “proud to be thrifty”. They communicate a noble purpose or positive theme that focuses their people on cost and value, and they generate informal momentum to encourage frugality. Thrifty companies tell stories to celebrate the frugality of leaders and to help people take pride in keeping costs low and create a sustained cost-reduction culture.
Companies facing an urgent need to cut costs seldom have a “proud to be thrifty”culture and can’t create one overnight. So, executives might say: “I know positive motivation is important, but I can’t see anyone feeling positive about cutting costs. So let’s mandate.”
Employee engagement is always critical in peak-performing cultures. High engagement can be harnessed to speed cost reduction – because people energise one another around specific tasks that move toward the same goal.
Executives who ignore employee motivation in their cost-reduction efforts should ask: Do we have all the solutions needed for cost reduction? Will mandated cost reductions be undermined without positive support from employees? Will rational compliance sustain the behaviours we need, or do we also need emotional commitment? Will cost reductions damage our value proposition to employees? Are we forcing short-term actions we will later regret? Are innovation, collaboration, and customer empathy critical; and do they require the energy and enthusiasm of our employees?
Motivating cost discipline
Having people feel good about tasks that are not financially rewarding or intrinsically motivating requires developing emotional commitment to support painful decisions, applying self-disciplined behaviours beyond mandatory processes, building peer respect and support for reducing costs.
Successful cost-cutting motivators enable positive feelings in four ways:
• Motivators cultivate cohesion and commitment. They energise people to work with them to reduce costs, encouraging actions that can’t be prescribed, and recognising employees with more than money when they take these actions.
• Motivators recognise the importance of fairness. They conduct cost reductions fairly and make the process transparent, timely, and effective.
• Motivators create a positive emotional case in addition to a rational business case. Both cases need to be clear. Leaders need to develop an emotionally appealing theme and decide on the primary carriers of that emotion through facts, not guesswork. Effective cost-cutters also enlist the best front-line motivators to connect sources of pride to the work in ways that mobilise people.
• Motivators use objective data to decide where and how to cut costs. Many approaches are required to get everyone onboard. Employees want to be involved in the problem-solving. You increase your odds of success in cost-cutting by involving people in ways that obtain positive emotional commitment to decisions and behaviour change. You can mandate your way to lower costs, but if you also motivate people in positive ways that produce emotional and rational commitment, you’ll get more costs out sooner.
Jon R. Katzenbach is senior partner of Katzenbach Partners and a director with McKinsey & Company for 30 years. Paul Bromfield is a Principal at Katzenbach Partners. Email: Paul.Bromfield@Katzenbach.com. Reprinted with permission from Leadership Excellence. Visit www.LeaderExcel.com