Are you cutting away at your foundations?

Are you cutting away at your foundations?

By Doug Henry

As the blood of IT professionals, management consultants and financial services professionals continues to spill on the streets of Australian business, under the guise of "cutting costs," one wonders when it will end and who'll be left to steer the ship into the future.

Is this form of cost-cutting necessary? Or, is it a knee-jerk reaction, a short-term plaster approach to making shareholders happy? Does "downsizing" really result in the profitability and productivity gains expected from such an exercise? Finally, what are these organisations doing to ensure the remaining staff are capable to moving the company forward?

Same Story, Different Day

It seems to be a daily occurrence that we pickup the newspaper or tune into the news and another "downsizing" or "restructuring" announcement is being made. Most recently, Vodafone announced another round of redundancies will soon take place, reducing the Australian workforce by up to 200 of the 500 current staff. This is in light of Telstra's recent acknowledgement that a further 10,000 staff would be cut in the coming months.

Over the past 18 months, we've witnessed industry giants lower their swords on their workforce at alarming rates:

Lucent Ð more than 25,000
Nortel Ð more than 30,000
Accenture Ð more than 1,500
Compaq Ð more than 8,000
Hewlett Packard more than 7,000
KPMG Ð more than 800
Cap Gemini Ernst & Young Ð more than 1,700
Coles Myer Ð more than 900
Optus Ð more than 900
Orica Ð more than 250

Source: company announcements

As organisations continue to look at ways to reduce their costs, operational expenditure tends to reflect the deepest cuts. But what is the real cost to the organisation?

winners and losers?

All too often, the motivations for downsizing or restructuring are grounded in showing shareholders or "the analysts" that the executive team are responding to economic slowdowns that force such cost-cutting. Some would go further and say that these moves are simply to secure executive bonuses by showing an ability to make the "tough decisions" and respond accordingly to prevailing economic conditions.

"Staff reduction is the standard way executives deal with declining profits," according to John Carlson, president of System Change. Jim Clemmer, president of the Clemmer Group, notes that "numerous studies have shown that "dumbsizing" sometimes provides short-term relief and protects short-sighted managers" bonuses while hurting companies in the long-term".

Still others might argue it"s justification for removing the "deadwood," to which few will readily admit. In addition, as Robert Golembiewski maintains, it "also begs two questions: How the "deadwood" was allowed to accumulate in the first place; and how its accumulation will be avoided in the future?"

Studies have shown that fewer than 30 per cent of downsizing efforts actually achieved anticipated profitability, while productivity increases were realised by only a third of the organisations.

The cost of downsizing can be reflected in low organisational moral and productivity. "Falling sales decline further, customer service slips, and quality drops Absenteeism goes up and accidents increase as stress, insecurity and resentment grows," according to Clemmer.

"What appears to be a low cost structure and related staffing model is often a high cost one when all the direct, indirect and hidden costs and lost revenues are layered in", adds Carlson. "Employee disloyalty, continuous turnover, hiring and firing activities, training and retraining, legal costs, theft, damage and even sabotage of equipment, software and a firm"s intellectual property (including its good name) degrade and even destroy a firm"s margins."

Employee Churn

Knee-jerk reactions that result in wholesale staff cuts often result in the loss of valued employees. Before an organisation knows it, they"ve taken a hit by losing the high performers, further weakening the organisation, and forcing it into a situation where staff must be replaced.

Paul Lee, principal at Deloitte Consulting in Sydney maintains the organisations must "understand the unintended cost-cutting consequences" before engaging in a downsizing exercise. Lee notes that the "most valuable people are the most mobile." This does not mean that organisations must fork-out the big bucks for top talent either. "If people come for money, they go for money," says Jeffrey Pfeffer, a Stanford Business School professor of organisational behaviour.

According to David L. Stum, president of the Loyalty Institute, "The cost of replacing an employee in today"s market is roughly one half of that person"s annual salary." "Finding applicants, interviews; pre-employment testing and admin expenses; medical exams; travel/moving expenses and training" are all contributors to employee replacement costs according to Stum.

Often within organisations, the "big picture issues" that come from top-level management (such as staff development strategies) are inconsistent and/or incongruous with the actions of the lower level staff. This can be indicative of a number of issues such as lack of communication up and down different levels of management, or cultural inconsistencies throughout an organisation. In other words, management may be "talking the talk," but aren"t necessarily "walking the walk."

"Organisations are successful when they allow all the people in the organisation to be successful," says Charles A. O'Reilly III, co-author with Pfeffer of Hidden Value: How Great Companies Achieve Extraordinary Results with Ordinary People.

Pfeffer and O'Reilly maintain that "too many organisations make assumptions that people either don't really want to work, are untrustworthy or aren't creative"" Lee points to the Australian mining sector as an example of where changes in internal resource development trends are being based on "values-driven programs".

The mining sector is taking a more "clever approach to staff development," maintains Lee, asking, "How do we get more creativity out of each employee?" The mining sector hopes that through the "introduction of collaborative tools and virtual work communities" "people-building virtues can be highlighted," according to Lee.

By focusing on retraining the existing pool of resources available to an organisation in order to plug holes in vacant or newly created positions, management create an opportunity to minimise employee churn. This further allows management to demonstrate their ability to lead the organisation through financially difficult times by appropriately forecasting strategic needs.

This is not to say that downsizing should not be used as a method of organisational cost-reduction. "Downsizing is sometimes necessary," maintains Golembiewski. It should, however, be approached cautiously and after all other alternatives have been exhausted.

Organisations will forever love to be considered an employer of choice, and therefore should fully consider their approach to downsizing prior to enacting it.

Anne Osborne Kilpatrick challenges organisations considering downsizing. "When in doubt, don"t. The costs outweigh the benefits for short-term solutions," she said. Kilpatrick suggests that organisations must "plan, plan, plan, particularly with those involved and affected."

"Planning should include long-range strategic planning, ongoing tactical planning and implementation of a lessons-learned strategy for continuous self-assessment."

Kilpatrick continues that an essential "part of this process also implies training for all the work force in communication, process improvement, and team building."

Kilpatrick concludes by noting that "the imperative regarding downsizing is to be sure that this alternative is the only one available to the organisation."

"Performance-driven executives shouldn"t target wholesale staff reduction when trying to manage profitability in a downturn except as a last resort." Carlson argues that "Profitability improvement does not come from downsizing: it results from better operational management focused on protecting and leveraging the firm"s core assets."

According to Carlson, core assets for revenue generation include people (employees and customers), intellectual property (very broadly defined), and technology.

"Mass layoffs are always a very last, desperate step for organisations with strong leaders who truly care about people," according to Clemmer. "At the centre of this rare leadership are core values around partnership and participation. High performing organisations manage things and lead people." Clemmer continues, "Management can be tough, but leadership takes real courage."

The Investment

"The challenge is to know how you want to emerge from a situation and respond accordingly. No knee-jerk reactions," argues Rob Metcalfe, managing director, Leading Initiatives Worldwide, a Sydney-based leadership development and organisational design consultancy. "It"s more about breeding leadership at every level in order to grow organisational capacity."

More and more investment is being made in resource development programs, particularly those with a focus on leadership development. Whether it be the flavour of the month, or that management are maturing in their acknowledgement that cultivating leaders from within makes sense, there is a significant increase in interest and activity for organisations like Leading Initiatives Worldwide.

According to Metcalfe, "organisations are typically confronted with questions that must be answered in order to move forward, such as:

What "structures" are currently in place?
What "systems" are currently utilised?
What "competencies" does the organisation currently possess?

Some organisations are becoming increasingly aware of their need to develop their resource pool through the current economic crisis. "Those that don"t invest in or embrace internal development, either won"t grow or exist in the same form as they did before," according to Metcalfe. Organisational "investment in personnel development must be in line with the investment in "other areas".

Deloitte"s Lee goes further stating that in their experience, "at least 20 per cent of expenditure in programs should be "people-focused". The focus must be on developing the organisation through its people. "Great teams and a great system are what make companies thrive," according to Pfeffer.

At War

"The first strategy of war is an armed force that is fully mobilised and consumed with the desire to win. Without that, all other strategies are vain" - NapoleonAccording to Tom FitzGerald, business is like war, and "to succeed in war, we must learn the ways of war, master its core strategies," the first strategy being "Mobilising the management teams into a business force that is motivated, driven and obsessed with creating corporate success; and operating together, not just in harmony, but in powerful, operational resonance."

Metcalfe maintains that the "single most critical success factor is that either the most senior executive or the senior management team must ask the "change" to happen as part of a coherent strategy" within the organisation.

For Metcalfe and Leading Initiatives Worldwide, it comes down to the concept of "C3." This concept comprises the "conditions for driving optimal performance" in leadership, which include:


"A leader"s competence creates the clarity, climate and develops the competence of the team.

"Clarity must be established first, as this dictates the requirements of the other two," according to Leading Initiatives Worldwide.

Metcalfe continues, "You can have charismatic leadership, but it's not sustainable," "some leadership styles can be taught (knowledge), and some are developed (behavioural)", these make up the "Competence" component of the C3 concept. "Knowing when to pull-out the "right" leadership style at the right time is what Metcalfe refers to as "Emotional Intelligence."

"While the concepts are simple to understand, enacting the concepts is difficult because you have to take into account all stakeholders," notes Metcalfe. "All too often the intentions are there, but the will-power to follow-through isn"t Ð this is why Clarity is essential."

It stands to reason that if an organisation has leadership that can communicate their aims and intentions with "clarity", there will be no misunderstanding by staff, as to what is to be achieved. Add to this, a "climate" that empowers staff to act on those aims and intentions, and a more "competent" organisation is likely to result.

These concepts, if appropriately championed at the top, would have such a simple yet dramatic affect on the culture of an organisation that success would seem to be the default. Yet, there are so few organisations currently investing in the internal development of staff today, in order to reap these rewards.

In order to change the expectations of an organisation's stakeholders, the organisation's leadership need to "lead". This is not demonstrated by taking immediate, dramatic steps like downsizing as a first-step in order to cut costs. It means being willing to recognise what is not working within the organisation and making the appropriate cultural adjustments.

Changing an organisation's culture does not happen over night. But, organisations must begin the arduous process of culture change if they are to expect change to happen at all.

Making the appropriate investment in the development of internal staff may provide just the catalyst to the organisation's cultural change, particularly when trying to develop a legacy of leadership within the organisation.

As time has shown, organisations that are quick to cut and slow to invest in the staff, especially when times are tough, will be among those organisations who enjoy less than a 30 per cent success rate in increasing profitability and productivity when the dust settles. In the long-run, they (and their shareholders) would appear to come out on the short-end and tend to die by the very sword they thought would save them.

Doug Henry is a director of The Oread Group, which specialises in strategic organisational change. For more information on the Oread Group you can reach Doug at

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