Cut costs, not heads: 5 strategies to prepare for the upturn
Employees are often a company’s greatest cost. As HR managers are being asked to devise ways to cut the wage bill, Sarah O’Carroll investigates other ways to save costs and make cutting head count the last resort
In every recession HR departments find themselves
faced with the difficult task of helping their com
pany cut costs to save the business. And often, many
of them opt to go down the redundancy route.
However, in studying the successes and failures of hun
dreds of companies as they navigate downturns, numerous
reports suggest that the long-term negative impact of cutting
head count often outweighs the short-term savings.
Most executives will say that they understand the
potential damage mass redundancies can inflict on both
the firm’s reputation and the goodwill of their employ
ees. However, ask those same executives what the best
way to cut the wage bill is and many will still respond
with the redundancy solution.
In a recent survey of HR directors conducted by
Hewitt, 81 per cent of companies said they plan to fur
ther cut costs this year even though they have already
made significant reductions. Furthermore, 28 per cent
say they are planning to do so by “restructuring” and
25 per cent are considering lay-offs.
Meanwhile, a recent Towers Perrin study of 600 HR
executives found that while cost pressures remain intense,
cutting too deeply into an organisation’s muscle – its talent
– could seriously hamstring a fast return to growth.
As economists and reports have stated, we have entered
this downturn very quickly and may come out of it equally
as quickly. The Hewitt study showed that 54 per cent of HR
directors believe the US’s economic upturn will begin at
the end of this year or in early 2010 and most believe their
own company’s economic improvement will coincide with
that upturn.
So it seems that the logical solution for companies
under economic pressure is not to buckle under the pres
sure in the search for a quick fix, but rather be creative
and innovative in looking for other cost-cutting strate
gies that will keep the company not only alive, but strong
for the upturn.
But what are the alternatives for HR departments
who are faced with the challenge of cutting the wage
bill? There are many other options companies can take
that will either cut costs, or counter the need to cut costs
by increasing productivity and performance.
Below are five cost-cutting strategies proffered by var
ious HR directors, academics and survey findings, which
will help companies avoid the dreaded redundancy road.
Strategy 1
Purchasable annual leave
PricewaterhouseCoopers (PWC) have had their “equi
librium” program in place for the past four years. It was
introduced as a flexible work arrangement whereby indi
viduals could elect to work in a range of flexible ways.
But, as the company felt the pressure of the downturn,
they opted to offer additional purchasable annual leave
for an extended period of seven months, until the end of
January 2010.
The offer was made to 4500 employees and was com
municated in a transparent way, so that each employee
knew the reason for the offer – to avoid having to take
the redundancy route.
The results of the offer were significant. Ninety per
cent of the 4500 employees accepted the offer to take
between 10 and 15 days unpaid leave.
“It was an amazing response,” says HR director of
PWC, Nicole Brazil. “It really said a lot to us about the
fabric of our organisation and that people know we are
all in this together.”
Exactly how much money the strategy saved the com
pany – and in turn how many jobs it saved – is difficult
to quantify, says Brazil. However, with more than 4000
employees taking an extra 10 to 15 days unpaid leave it’s
easy to say it would have a huge impact on overall savings.
Year on year, more people have elected to take up flex
ible work options within PWC, but because economic con
ditions forced the company to offer employees this extra
annual leave it had more benefits than just saving money.
According to Brazil, it gave some people
the opportunity to do things they otherwise
would not have done.
“This seven months program has given
people the chance to stop and think about
flexible work options,” she says.
Brazil also believes that this measure
will be far more beneficial to the company
than letting people go in preparation for
when the economic pressure eases.
“Our people know that this will help
to protect jobs, without a doubt, and they
also know it’s temporary. This will help
protect the fabric of our organisation to
position us really well for when the upturn
happens, which it will.”
Strategy 2
Job sharing
At the outset it might not seem like a cost-
cutting strategy, but, according to Franco
Gandolfi, director, MBA/EMBA programs
and Professor of Management, Regent
University in Virginia, US, job sharing can
actually work as a means of saving cash.
If two people are doing the one job, in
one sense there are the same costs
involved because a company still has to
pay the same salary for a particular role
to be performed. However, according to
Gandolfi, some companies in some indus
tries in some countries may not provide
benefits for part-time employees. So in
that sense there is a cost saving to be had.
“In the US for instance, non full-time
employees do not receive benefits. So
although they may not save on the salary
component, they will save on the benefit
component which could be things such as
health, dental, retirement, etc” he says.
Job sharing also leads to reduced absen
teeism and increased productivity. Gandolfi
says that one advantage of having two peo
ple doing the one job is that when they
work out a schedule to do certain hours
they therefore have more time off work and
tend to turn up for those scheduled hours,
leading to decreased absenteeism.
The downside of job sharing, however,
is the unpredictability for the customer,
because often customers expect the per
son they are dealing with to be there from
9 to 5, Monday to Friday. But, he says,
overall the advantages outweigh the short
comings of this arrangement.
“Job sharing tends to motivate people,”
he says. “Loyalty is up, productivity is up,
but where the customer is concerned it can
be less predictable. However, overall the
advantages over-ride the disadvantages.”
Strategy 3
Pay cuts and reduced hours
A recent Employee Insights Survey of 560
Australian professionals showed that
nationally, 70 per cent would prefer to
stay at their current employer and work
reduced hours than face alternative cost-
cutting strategies.
Surprisingly, taking redundancy was
the next most popular choice – 16 per
cent listed it as their preferred choice.
While reduced hours was the preferred
method of cost-cutting across the board,
interestingly, opinions differed across sec
tors of specialisation. Those in the legal
sector were the least adaptable to alter
native strategies, with an overwhelming
100 per cent listing reduced working
hours as their preferred initiative. Those
working in the fields of general manage
ment (85 per cent) and HR (83 per cent)
appeared to follow this opinion.
Gandolfi says one of the most success
ful strategies globally has been to cut both
pay and hours. But the key to success when
taking this strategy is to cut it across the
board – by including every person in the
organisation. The management must tell
the employees what the situation is and
explain the environment they are working
in. They must explain that everybody is
going to cut back in order to save jobs.
If pay cuts are not across all levels of
the organisation, he says, it creates a level
of cynicism and consternation among
employees. People want to see that the situation is affect
ing everybody – including senior executives – and that
those strategies are a genuine and sincere attempt to save
the company.
“What it comes down to is [that] people need to buy
in,” says Gandolfi. “If you have employees buying in and
they see what you’re doing and why you’re doing it and
it has a good level and degree of fairness, then people
will work with you.”
Strategy 4
Work with employees – not against them
Gandolfi also notes that, in a lot of cases, cost-cutting meas
ures are driven from the top down and mandated from the
board of directors. But he believes that sometimes it is bet
ter to go to employees themselves and ask them how they
think they could save money or increase productivity.
“The job incumbents themselves, each of them knows
their own jobs themselves and each of them knows where
there is corporate slack,” he says. “So if you can work
on a system and involve the employees on eliminating
slack – eliminating non-value-adding components of their
work – it produces a lot of buy-in and goodwill.”
This is the approach that law firm Freehills has taken.
According to HR director Gareth Bennett the impor
tant part of the efficiency story is that it’s the smallest
part of the story. The real trick, he says, is building
goodwill and employee focus and the important part is
the growth agenda.
“The differentiator between companies in times like
this is getting out there and growing the business and
seeking opportunities to expand and grow when every
one else is hunkering down,” he says.
Bennett says that increasing performance by 1 per
cent has a much greater impact than reducing employee
costs by 10 per cent. It is for this reason he has focused
on increasing performance under economic pressure.
“Look at our client base and see how we can work
with them in innovative and creative ways,” he says.
“We’re running a lot of courses to coach and educate
our lawyers to show them how they can get out there
and better help our clients and also exceed those require
ments. A lot of our clients are going through a rough
time and they, therefore, really appreciate that.”
The other big way in which HR can make a difference
is through talent management, he says.
“HR can really make a difference by identifying who
our best players are, who will bring us through this
period and how can we help these employees, coach
them, and position ourselves to ensure we keep them
and mitigate the risks of them leaving.”
Because of the speed with which we entered this down
turn, and the possibility that we may exit from it just as
rapidly, says Bennett, if a company doesn’t have the right
people in place to respond when the upturn comes, it will
be in danger. Therefore, according to Bennett there are a
lot of dangers involved in cutting costs too much.
“You need to be able to explode out of the box,” he
says. “If you’re just cutting costs and cutting costs …
when the upturn comes you don’t have the people or
the structure in place to respond.”
“Everybody turns to cost cuts as a good way to go,
or taking out numbers as a good way to go – but it’s
got a huge cost in terms of brand damage and reputation
and that’s one of the hardest thing to get back.
Bennett says the real solution is to work with your
employees to be creative, innovative and cut out non-
value-adding components of their work day.
“The idea is to work with your people rather than
do things to them, so that they feel part of the solution
rather than part of the problem.” says Bennett.
Strategy 5
Avoid layoffs – at all costs
Gandolfi, who has conducted extensive research on
downsizing, right-sizing, lay-offs, and involuntary redun
dancies, says that, in his mind, lay-offs must be avoided
at all costs. He says it must be the very last resort.
“It has such a huge impact on the culture of a company,”
he says. “People do not forget.
“It impacts their motivation and although produc
tivity may not be impacted short-term, in the long-term
loyalty gets affected, work satisfaction gets affected,
innovation gets very much affected.
“You have all these negative aspects which sometimes
are very difficult to quantify. You spend years and
decades building a corporate culture and then a bump
occurs in the economic cycle and managers jump straight
to redundancies.”
He says, however, that lay-offs are not always
wrong – and in the current case of General Motors for
example, it would be impossible to avoid lay-offs.
But companies must look for a solution that is
creative, he counsels, that will work in the short,
medium and long-term and keep in mind that the eco
nomic downturn is only temporary and will pick
up again.
