Managing in Financial Adversity, Part 4 (#154)
/In this podcast episode, we discuss the things not to do when a business is confronted with a period of financial adversity. Key points made are noted below.
How Not to Deal with a Bad Financial Situation
In the first three episodes, I talked about how to correctly handle situations where a company’s financial situation declines. And that leaves room for one more episode about how not to deal with a bad financial situation. What I’m going to describe this time, you’ve probably seen or will see at some point in your career. I know I have.
Doing More With Less
The first way to not deal with bad finances is the concept of doing more with less. Also known as firing a bunch of people and spreading the load among the remaining lucky few. From the viewpoint of management, the remaining few are lucky, because they still have jobs. But because management didn’t redesign the business to pare away parts of the company, the work load can be enormous. And that leads to some bad effects.
First, there’s no longer any corporate culture. Because the work day is longer and the work load is larger, there’s no time for employees to mingle. And there’s no time for company-sponsored events. In short, all of those subtle reasons that make a work place enjoyable go away, which increases employee turnover.
Second, there’s employee burnout. Work days get longer, and weekends become work days. After a while, people start making mistakes because they’re always rushed. Efficiency improvements disappear, because no one has time to think about installing best practices anymore. And, employees are more likely to become sick, but they need their jobs, so they come to work anyways. For all of these reasons, productivity declines.
But we’re not done yet. Some of the extra work is being dumped on people who don’t know how to do the work, because the people who used to specialize in that work have been let go. And there’s no time or money to conduct training in the extra work. This means productivity goes down and error rates go up. And, because the remaining employees know they’re not doing a good job on these new tasks, their morale goes down.
Eventually, the best employees will find work elsewhere or shift into different careers.
That means the “A” level employees are gone, which leaves the B and C grade employees behind to run the business. And that means the productivity level declines even further.
So. The end result of just laying people off and spreading work among the remaining staff is burnout and lack of initiative, which leads to bad morale, reduced productivity, and losing your best employees. And yet, this is what managers do all the time. They call a staff meeting and look sorrowful, and declare that everyone has to pitch in together to pull through the crisis.
If the only thing a manager can do is a great sorrowful imitation, then they’re going to get what they deserve, which is a failed company. As I’ve been saying in the first three episodes of this series, a smart manager should very carefully reconfigure a company so that it can operate normally at a reduced level of expenditure. And that does not mean laying lots of extra hours on the remaining staff.
The Impact of Fairness in Cutbacks
Another scenario is when management decides to be “fair” to all parts of the company in a financial downturn, and decides to require the same percentage of expense cutbacks all over the company. This is another mistake, for a couple of reasons.
First, some department managers are better than others at controlling their expenses, so a tightly-run department could be devastated by a mandatory expense reduction. Meanwhile, someone who’s been very loose in managing another department may find that it’s quite simple to accommodate a cutback, since there’s so much excess spending already going on in the department.
And, a side effect of this situation is that managers learn to maintain a buffer of excess expenditures that they can unload during the lean times. And that means the company is maintaining too high a rate of expenditure all the time.
Second, some parts of a business are more important than others. Do you really want to impose a mandatory, across-the-board cutback on areas like R&D, or sales? If they’re driving revenue growth, that could be a really bad idea.
And we have one final scenario, where you think that the financial downturn will be a relatively short one. In this case, what may appear to be a prudent and humanitarian decision is to spread the pain around the entire organization, and impose a temporary pay cut on everyone.
This approach may actually work if there’s a reasonable expectation that the situation will improve soon. In that case, paring back wages allows you to retain talent, and it can build trust with employees. The problem is that it doesn’t work very well if management is simply hoping and praying that sales will improve. There may be no basis for such a belief – the industry may not be cyclical, so sales probably won’t come back. In this case, cutting back on wages has a couple of negative effects.
First, it means the sole method by which management is dealing with the crisis is by cutting wages. That isn’t exactly proactive. From a competitive perspective, it’s not good, because the management of a competitor may be reacting differently. They may be restructuring their business model, so they can really pound away at their competition – which, of course, will make matters even worse for the first company, which simply imposed a pay cut.
And the second negative effect is that no one knows how long the pay cuts will be in effect. So, if sales don’t increase, and time goes by, then look for the A level employees to leave the company. And maybe to go work that more proactive competitor that I just talked about.
So imposing an across-the-board pay cut is not always a good idea. If you’re going to impose one on an organization, then at least set up a mandatory review date that’s not too far in the future – like a month off. When that date arrives, make a realistic assessment of the situation, and decide whether to prolong the pay cuts to another review date, or to take more decisive action.
My main point in all of these discussions about dealing with financial adversity is that it takes quite a bit of analysis to understand exactly where costs can be reduced. In most cases, a broad reduction in expenditures is not warranted, and it may damage the company.