Can Cost Cutting Turn Out to be Expensive?

Downturns are part of an economic cycle. Every few years or so, the economy stops growing at a rapid speed. At first, the growth rate decelerates, then stagnates, and finally,, when negative growth appears, a recession officially kicks in. It is no mystery that generating revenues during recessions can be quite difficult. This is the reason why a lot of companies start focusing on cutting costs instead. Over the years, many companies have undertaken many different cost-cutting endeavors. However, in some cases, instead of saving costs, these endeavors actually end up costing the company more. In this article, we will have a closer look at some of the common cost-saving policies that end up going sour.

Reducing Salaries

Salaries are a part of the overhead cost structure at any company. Hence, they tend to remain fixed even though the sales deteriorate. This is the reason why it can be tempting to cut the salaries whenever the company faces a downturn. However, it is essential that such a temptation is avoided. This is because even in a downturn, there is still a competitive market for productive workers. No productive worker is going to take a pay-cut lying down. Pay-cuts will only drive out the high performers. Also, when companies enforce pay cuts, they also hire people at lower salary levels. Hence, productive people will leave and most likely be replaced by unproductive people. It is essential that salaries are not viewed as discretionary expenses by the management.

Laying Off People

If there is anything worse than salary cuts, it is indiscriminate lay-offs. It is important to draw the distinction between performance-based layoffs and indiscriminate layoffs. If a company identifies non-performing people and gives them a soft landing on the way out, it may be accommodated by the employees. Of course, there will be resentment. However, the majority of the employees will view the company as fair. On the other hand, if companies simply fire entire departments or even shut down plants, then the consequences can be damaging.

Consider the case of Nokia, which decided to suddenly shut down a German plant which employed over 2300 workers. Within no time, there was a huge demonstration where more than 15000 people protested against Nokia. Nokia also faced a huge backlash on social media as supporters of the plant workers called for a complete boycott of all Nokia products. Lastly, the German government had to intervene. The German government asked Nokia to return all the subsidies that it had received when the plant was first set up. The end result was catastrophic for the company as they ended up spending more than $120000 to fire every employee! On top of that, the campaign was still a major public relations disaster. The image of Nokia took a massive beating and may not have completely recovered ever since.

Micromanaging

Multinational companies tend to conduct routine audits. Sometimes, these audits end up pointing out to possible mismanagement. For instance, it is possible that some employees in the company were deliberately misusing their privileges in order to obtain more money from the company. On the other hand, in some cases, management tends to outsource work to their own friends and relatives even though they may not be the best subcontractors for the job.

In such cases, some companies tend to end up creating tedious processes which add up to their costs. Majority of the employees in any company tend to follow the rules even if they are simply laid down. There is no need to create elaborate rules and complex processes which add to costs.

Cutting Training Costs

There is no harm in cutting training costs as long as the value created by training is not reduced. For instance, if companies are able to replace personal trainers with digital training and reduce costs, that might not be a bad thing. However, simply disregarding training in order to lower costs has always proven to be a disastrous strategy.

Firstly, as a company, your workforce is likely to become less competitive if you do not invest in training. Secondly, both high performers and low performers will end up leaving the company. When companies do not provide training, low performers have no chance to improve and are simply asked to leave the company. As far as high performers are concerned, these tend to be people who are driven by the need to learn new technology and upgrade. In the absence of training, they tend to leave companies and join other ones where they can continue their pursuit.

Not Investing In Technology

Many industrial giants have lost their advantage to newer companies since they failed to invest in technology. Information technology is a dynamic field in the modern world. This often means that companies have to keep up buying licenses to new technological tools in order to keep their systems up to date. It may seem tempting to skip a few updates and save costs. However, if the record of economic history is considered, it may turn out to be a bad move and may end up costing the company much more over a period of time.

The bottom line is that cost-cutting is no child’s play. Companies need to be very careful that they don’t cut costs where value is also lost.


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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.


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