When “Strategic” Cost Reduction is Really Just Whacking…

Cost reduction is easy…Doing it right is hard.  

Any strong, financially based view of productivity must address the cost side of the equation.  So, we are faced with the need to assess, restructure, and consequently reduce costs.

Cost reduction and restructuring exercises are underway at companies around the world at any given point in time.  Just ask the likes of IBM, which recently found itself mired in a bit of bad PR around the scope and magnitude of cost cuts coming in 2015.

Any leader who has been through one of these exercises can tell you how harrowing it can be.

It’s not harrowing because of the topic itself…After all, any Neanderthal can lop costs. Just tell him how much to go get, and he will get it.

It’s harrowing because cost reduction exercises are tough to get right.

Cost reduction exercises start with either a burning desire to improve a strong company, or a burning platform under a struggling one.  But, what separates a true “strategic cost reduction” mindset from our friendly Neanderthal whacking away is a considered approach to performance and risk (notice I didn’t say cost) that centers on effective allocation of burden and costs.

Unfortunately, whacking can become the norm.

Let me tell you why.

The corruption of strategic cost reduction

Usually, a strategic cost reduction exercise begins with a provocative question.  It’s the sort of question that gets any organizational or budget leader into a sincere case of the willies quickly.

“How would you do what you need to do with 40% fewer resources?”

It’s a scary question, but one that is a great stretch exercise for any organization at any time.

Applying a strategic cost mindset, such a question is intended to invoke the necessity of invention that more incremental approaches can never get to.

Just look at the structure of the question:

“How would you do what you need to do…” This piece of the question implies creativity on the output side.  Are you doing too much?  Are there things better left to others?  Could you justify the first and last outputs that you and your organization are creating? Are you covering your key risks?

“…with 40% fewer resources?” – This piece of the question gets at the input side…In this case, justify the resources in light of the outputs.

Done well, strategic cost exercises that root themselves in the question above result in leaner, more effective organizations with better clarity and stronger culture.


…Executives who use this sort of thought process to reduce costs have a pernicious tendency to fall out of a strategic cost mindset and into a whacking mindset.

They ask their people “How can you reduce costs by 40%?”

What’s the nuance?  It’s in the implied calculus around inputs, outputs, risks, and justification.  In the first (and best) case, the question posed is a creativity inducer.  In the second case, it’s simply an order couched as a question.

That is the realm of legendary whackers like “Chainsaw” Al Dunlap.

Many, many executives and consultants have taken this sort of 40% question–intended as a thought starter and creativity driver–and turned it into a fait accompli.  

So, what’s the right thing to do?

All situations are different. But, the right thing to do is ensure a structured approach to evaluation, action, and strategic alignment.

In one client I served, a transportation provider facing significant financial stresses following 9/11, the strategic cost exercise was about the solvency of the company. Its leadership team faced an existential threat and had to act fast.  But, rather than just issuing an order to “cut costs” by a given percentage (the whacker’s favorite approach), the company’s leadership took a highly structured, thoughtful, but blisteringly fast-paced approach.

In another client situation, this time in packaging, longer term structural changes in the industry led to a need for rethinking the company’s organizational and operating footprint.  The two things went together.  With a measured approach, the company found more than 20% improvement in cost structure through organization and footprint alone.

And, get this, neither of these companies killed morale.

Wait! What?  Neither, you say?  Come on! These exercises are murderous to morale…Right? 

Not really.

And I’ll tell you why:  The ones who get this sort of exercise right start with strategy and mission, and end with a better organization at a lower cost aligned with the strategy and mission.

The ones who get it wrong start with a number, usually a percent or hard dollar number, and end with a number.

The right thing to do is to measure, then cut.  It sounds simple; but it isn’t.  Any time a significant cost reduction effort is undertaken, it is about redesigning the operating model of the company.

Whacking isn’t the way to do such a thing.

One warning:  Depending on point of view, it can be both…

One thing to be very careful about:  Some of these exercises can be strategic and driven very carefully from the top; but because of breaks in communication or agency problems they can at the same time be viewed by the organization as arbitrary whacking.

Senior leadership sees itself as implementing a strategic cost framework.

Senior leadership’s agents–perhaps aggressive middle managers or consultants under pressure to deliver budgetary numbers–resort to the whacking model.

People on the ground see job cuts coming like artillery barrages.  Sure, there’s some rhyme to it (perhaps the stanza repeats every budget cycle), but the reason isn’t there.

All action obtains meaning, regardless of whether meaning is communicated.

A structured, thoughtful, strategically aligned, and well-communicated approach to productivity improvement is the foundation of a modern performance ethic.

I’d be interested in your thoughts and experiences in this area.

9 replies
  1. Richard Miller
    Richard Miller says:

    I think most people in an organization can readily understand and get on board when the strategic need for cost reduction has been clearly expressed. Where I have seen problems is when the rationale revolves around “making our numbers”. That translates to the rank and file as “so you can get your bonus” and leads to cynical if not outright unethical compliance with the directive. It really does need to be an exercise in changing the way that you conduct your business. The key is that the motivator has to be a true change required by strategic considerations rather than short-term fix. Cutting cost to make a short-term objective is only appropriate if the need is small and the chance of damage minimal.

    A second watch-out would be that while it is unreasonable to expect everyone to cut costs by the same percentage it is imperative every area commit to some savings. No operation is so lean it can not find anything. It an uphill battle if it is perceived that some areas are exempt especially at the higher levels of the organization.

    What is frustrating is that the “Chainsaw” approach may take a long time for any negative repercussions to be felt. Al Dunlap is a great example (he got away with it for quite a while) but even within organizations a guilty practitioner may have moved on and often up because of using that approach.

  2. Geoff Wilson
    Geoff Wilson says:

    Interesting thoughts, Richard. I’m a little less committed to the “everybody plays” theory when it comes to cost management when not in crisis. Sometimes it’s okay to overinvest in “A” and harvest from “B.”

    It’s kind of like rebalancing a portfolio. Still, the principles you and I outline apply no matter what.

    Also: Great comment on Al Dunlap. People (myself included) forget that for all his bluster and commitment to cost cutting, he was a serial fraudster underneath it all…He never intended to leave organizations intact for the long term. The main reason he was caught at Sunbeam is his pump and dump approach to career advancement failed in the face of a soft M&A market. Nobody bought Sunbeam when it was primed for sale, and it was exposed as a fraud once Dunlap’s handiwork had to stand on its own.

  3. Richard Miller
    Richard Miller says:

    I think the real question for the long term is how does a BOD get sucked in by that kind of sleight of hand that borders on fraud? There is a crisis in our present culture that business is “evil” that is largely due to corporate governance. These people get money for serving on the BOD and need to EARN it.

  4. Geoff Wilson
    Geoff Wilson says:

    Richard, I’ve had the opportunity to work with quite a few boards and participate in dozens of board meetings inclusive of Fortune 500, closely held large private company, smaller for-profit companies, and large and small non-profits. I’ve been in board meetings with highly engaged directors actively problem solving with management; and I’ve been in board meetings where directors (literally) fell asleep in the meeting due to disengagement.

    Given that, I’d say that the answer to your question about how boards get sucked into destructive short termism (a la Dunlap) is through a combination of (1) complacence, (2) misplaced trust, and (3) management’s willingness to actively take advantage of both 1 and 2 by glossing over conflicts of interest, destructive but self serving decisions, and outright fiduciary breach. An active non-executive chairperson or a strong lead director, and a healthy and independent internal audit tend to be the keys; but all have to be willing to exercise the power that is inherent to a Board.

    It can be hard to do in the face of management who are confidence players and who are grooved in nicely and willing to resort to a bit of righteous indignation when questions are raised (Colonel Jessup’s speech in A Few Good Men is a great albeit over the top example of the righteous indignation I’m speaking of: “I have neither the time nor the inclination to explain myself to a man who rises and sleeps under the blanket of the very freedom that I provide, and then questions the manner in which I provide it.”).

    Remember. Dunlap had created tremendous “value” for prior shareholders…Even if the value was proven to be fraudulent on reflection. It’s very easy to sit back and let the magician perform his magic for you when you are the one getting paid for each trick.

    For a real picture of this insidious tendency, read up on the Bernard Madoff ponzi scheme. LOTS of people had deep suspicions that Madoff was a fraud for years before he was finally exposed publicly; but the people who knew or suspected it were either making money in his funds or from funneling money to them OR they were shouted down by those who were.

    People rarely look a gift horse in the mouth.

    There has been a lot of noise both pro and con about activist investors and what they have done with boards; but on balance, they tend to sharpen focus of companies and create board environments that drive better decision making by management and better alignment of strategic interests. I posted an article by McKinsey a while back that addressed short termism. Here’s a link in case you are interested.


    All this links to the “whacking” topic very directly (as you’ve noted) because of the tendency of “whacking” to be misaligned with longer term stakeholder interests; and (as you, again, noted) sometimes the only way to get it right is to have BODs get their job done.

    One is always left to ask: Quis custodiet ipsos custodes?

    Thanks for commenting.

  5. Richard Miller
    Richard Miller says:

    Great response. Most of my experience was with a company whose Chairman was rather engaged even if all the board members were not. 🙂

  6. Dawn
    Dawn says:

    Great insight – “The ones who get this sort of exercise right start with strategy and mission, and end with a better organization at a lower cost aligned with the strategy and mission. The ones who get it wrong start with a number, usually a percent or hard dollar number, and end with a number.”

    I’ve seen reductions that started with a number (reduce costs or headcount by X). Invariably the focus is solely on reaching the goal, not on the impact of that cut. Meanwhile, when I’ve seen organizations that start with “tell me what you really need to get to this goal as efficiently as possible,” we’ve ended out rethinking the whole organization and finding better ways to accomplish the goals at an even lower cost.


Trackbacks & Pingbacks

  1. […] effort that just doesn’t feel…strategic?   For example, I’ve written about how “strategic” cost reduction efforts can become merely “whacking.&… That’s the kind of thing I have in mind, but there are many […]

  2. […] post was inspired by some commentary on a prior post regarding strategic cost reduction efforts.  In the course of thinking through the comments I received, I realized that there is a real gap […]

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