There’s no sugar for spending cuts, but we must avoid the salami slicer
Later today, the UK’s chief financial officer, Jeremy Hunt, will share his plans to balance the books and keep the UK solvent or, at least, investable. Managers everywhere will find this relatable. Most of us have needed to reduce costs, whilst keeping the show on the road, during recent years of pandemic, followed by this current period of rising costs and dampened demand. And just this past week Amazon, Disney, Vodafone and Facebook have all announced big cuts.
So, what wise words might there be for Mr Hunt, or any executive faced with cutting costs?
I’ve been meeting fellow entrepreneurs and chief executives regularly for 25 years to give and receive advice. In that time, my company grew from a bedroom start-up to over 100 staff during the dotcom boom, back to a core team of 33 in the ensuing crash. We survived, and are now a listed company with well over a thousand colleagues, across 20 global offices. I’ve been listening hard, for a long time, to the most valuable advice about managing cost reduction programmes.
Most successful leaders start by setting an example to let their people know they are both serious and fair. One founder of a creative agency reluctantly made sure that the first role cut in a 40 per cent cost reduction programme was his own beloved PA. Culling pet projects also sends a message that decisions will be just. The Bavarian chief executive officer of a pan-European parts manufacturer demonstrated this by announcing the closure of their last plant in Germany – a decision seen to be based on data alone.
Once your organisation knows you are serious, an effective cost reduction programme should involve the people closest to the detail. Share the numbers transparently, provide stretching targets, and ask the teams who run the business day-to-day to suggest actions. This is an opportunity for those teams to point out what might be invisible to management. Operational teams, when involved properly, tend not to mount a Sir Humphrey-style resistance. They can, in contrast, be over-zealous. More than one chief executive has commented on the “red mist” that can descend on middle managers, such that they plan extreme cost reductions that are more brutal than the business performance demands.
In 1986, Ronald Reagan memorably explained that the nine most terrifying words for a business person to hear are “I’m from the government, and I’m here to help.” But it was a senior civil servant who told me that the most effective cost cutters look to eliminate entire activities. His advice was to fight the tendency to “salami slice”, cutting all costs by a thin amount. This can make the remaining cost-base even less productive, given that the residual activity will still absorb time and resource. Instead, look at which cost centres can be taken out entirely. Rather than trimming, say, the social-media budget, or your office in France, by 50 per cent, consider cutting them 100 per cent. I imagine this was Elon Musk’s motivation this week when he announced the absolute end of free lunches at Twitter.
The most important advice is to demonstrate your commitment to the company’s vision even as you cut costs. Reducing projects, investment and jobs can be a miserable and soul-destroying process – successful leaders need to be able to explain, to themselves and their people, what it’s all for. How will these changes create a better business or workplace? Counter-intuitively, this can mean creating some sacred cows. If your company’s future vision depends on marketing, then show that operational cost-savings allow for an increased advertising budget. If your future depends on digital transformation, then show that reduced office costs and a travel ban can allow a sustained tech spend.
After the real pain of cost saving, many businesses have come through stronger and healthier. But only if they have a visible plan for a brighter future.
Let’s hope that the budget later today will not be an untargeted “red mist” exercise, but a coherent set of actions, framed by a credible vision for a better Britain.