Redundancy's no answer

Redundancy's no answer

Arbitrary decisions to reduce head count are not the way to cut costs and can, in fact, do more damage, argues Will Fatherley.

Whether around the boardroom table, on the golf course or by the water cooler, everyone has been privy to conversations about companies that have been through at least one round of cuts – with usually around 10% of staff across the board paying the price. Some readers may even have led the cuts at their organisation or experienced them the hard way, through redundancy.

When times get tough, pressure soon builds and stakeholders look for decisive action. Scrutinising accounts invariably shows salaries as one of the big overheads. Management often then leap ahead - reducing head count, while expecting those left to cover the additional work. But although losing some of your workforce is never an easy decision, it’s almost always the wrong one too.

In most cases the best staff leave, remaining employees suffer and in time, quality and clients suffer. The business spirals downwards.

It becomes harder than ever to turn it around. The good news is that those desperately needed savings can usually, with effort, be found in a more structured way elsewhere. The road to success lies in objectivity.

mploy someone internally or externally with the time and knowhow to scrutinise your businesses processes - not just the figures in front of you - and you’ll be astonished at what comes back.

Quick wins can be gained doing this in even the most basic ways. For example, when negotiating deals or looking at supply contracts, businesses often neglect to build in review periods – or don’t actually carry the reviews out.

The worst cases arise where a supplier has been in place for years and good service has created loyalty. It is guaranteed that those contract fees will have increased over time.

A quick review of competitor costs can be an eye-opener and a useful prompt to reopen dialogue. Admittedly this is an approach which may be more appropriate to commodity markets; the delivery of key performance indicators should be the focus where more stable markets are concerned.

Having looked at price, which can reveal savings, look at the consumption of these goods and services. Ability to identify waste is a very powerful thing within a business. Research by the Lean Enterprise Research Centre has shown that in physical environments (such as manufacturing or processing), only 5% of work done is what the customer is paying for – the rest is either waste or a support activity.

In the environment of information (eg offices), the figure drops to 1%. If you know how and where your business is being inefficient, you can address the situation. Organisations can quickly eradicate waste and make savings if they take the time to look and find it.

Properly looking at what’s going on within an organisation can actually cause deep unease at management level, which is why many businesses choose to maintain the status quo. How often have you heard someone say they’d do it differently if only they had a blank sheet of paper?

A restructure is a brave move but can pay dividends fast – and it doesn’t have to be synonymous with job losses. Interrogating processes may take time but are worthwhile. March ThirtyOne has just completed a study for a North East Top 200 company and is now projecting to save 20% of its base costs, working out about £300k a year.

The key to this achievement was an ability to get under the skin of the operation, identify excess consumption and waste and structure a planned solution based on the needs of the business. One of many reasons why Nissan is a world leader in its sector is because it has continuous improvement at its heart.

When the recession hit, among other initiatives it introduced Free Cash-Flow Management. Recognising it might not be able to rely on cash from sales and profit (remember, cash flow is king), it focused on expense and inventory reductions.

These have enabled it to continue its investment into new core technologies for the future, such as the electric vehicle and global compact car. It forced itself to look internally for solutions, showing what can be achieved when you do this. Conversely, the public sector has the reputation it does because cost improvements have historically not been at its heart.

Ever had a public sector contract and been asked to bill for work not yet carried out before the end of March so the contact can safeguard next year’s budget? This is illogical and potentially damaging to the business. Money should not be ring fenced because that was the figure allocated the year before – instead the budget should reflect the costed plan for the year ahead.

With the right rationale, it’s possible the budget could increase rather than decrease. There are no good and bad industries where achieving cost efficiencies are concerned.

It all comes down to the culture within an individual organisation. Those investing the time and resources to look openly and honestly at their procedures – and making changes where they’re merited - are the businesses seeing a positive impact on their bottom line.

Will Fatherley is managing director of  March ThirtyOne.