General economic indicators are showing positive movement. Consumer sentiment has rebounded, experiencing a notable increase of 21.7% in January 2024, its highest level since July 2021. Inflation is stabilizing across broad categories of goods and services, while unemployment rates remain steady. GDP output is demonstrating reasonable growth, and the supply chain has resolved many of its previous challenges over the past few years.
However, despite these encouraging trends, there is a sense of caution in C-Suites as consumers are tightening their belts, potentially signaling a cooling off in spending. The contrast between the apparent strength in the U.S. economy and the emerging consumer spending decline highlights a delicate balance. Moreover, consumers are accumulating revolving debt with high interest rates, particularly through purchases of goods, automobiles, services, travel, and entertainment, and the housing market has cooled off as it awaits potential decisions from the Federal Reserve regarding borrowing rates.
In addition, an examination of the operating profits of companies reporting earnings over the past six months reveals that they are grappling with pressures on their operating profits, often resorting to job cuts as a strategy to mitigate these challenges. Numerous companies, including some of the most recognizable brands in the U.S., have recently announced workforce reductions and layoffs. Notable among them are JP Morgan, LinkedIn, Morgan Stanley, GAP, Jenny Craig, 3M, Deloitte, Whole Foods, McKinsey, Davids Bridal, Walmart, Accenture, GM, Yahoo, Twitter, Disney, Dell, FedEx, Intel, IBM, Hasbro, SAP, Google, Microsoft, and Amazon. The list could expand as 2024 progresses.1
Difficult Decisions for Executive Leadership
Layoffs and reductions in force (RIFs) serve as stark reminders of unforeseen shifts in business conditions and unsuccessful strategies in navigating market dynamics. While the decision to trim the workforce may alleviate immediate pressures, demonstrate decisive action, and reassure stakeholders, it often merely addresses surface-level symptoms without tackling the underlying issues; it is "nibbling around the edges" of serious challenges that must be addressed.
Too many companies take this approach, resorting to "cutting heads" as a quick fix, roughly calculated from the top down to hit a specific target. Typically, the result is a list of individuals who are the easy targets for elimination, often those with significant expertise and frontline experience, essentially the "do-ers" who interface directly with customers. While such actions may provide a quick boost for the next earnings report, they represent nothing more than a band-aid that will ultimately haunt the organization, hindering growth and long-term profitability. This cycle often perpetuates with further rounds of workforce reductions in subsequent quarters, creating a damaging pattern of instability and erosion of organizational capabilities.
A Different Approach
Quick fixes are not the answer. Instead, an approach centered around generating value for shareholders can have long-lasting impacts on the strategic future of the company.
- Define and Align on Strategic Approach – Align cost-cutting efforts with the overarching business strategy and enable responsiveness to shifts in the business environment.
- Employee Engagement – Employees must understand the long-term strategic vision, feel motivated to contribute to sustainable cost reductions, and be prepared to engage in making tough decisions.
- Culture Shift – Transforming the cost mindset requires a cultural shift; make cost optimization a part of the company mindset, rather than a one-time initiative.
Define and Align on Strategic Approach
A well-crafted business plan will serve as a roadmap to guide all stakeholders towards a shared vision and strategic objectives. In addition to defining clear goals, strategies, and tactics, leadership teams must (1) identify opportunities to grow the business through entry into new markets and geographies, potential merger & acquisition (M&A) activity, and expanded product and service offerings, and (2) respond to competitive pressures, market dynamics, geopolitical issues, interest rates, and the potential impact(s) of AI.
The two to three-year strategic plan (five-year plans can be unrealistic in today's fast-paced world) should integrate input from key stakeholders, including the executive team and board members, to plot a course that aligns organizational goals with market realities. All research and information must be synthesized to show the "big picture" – a critical assessment of the competitive landscape and how proposed changes will enable the company to adapt and succeed.
Engage Employees and Translate Plan to Action
Initially, align the team by communicating the strategic plan, including an honest and comprehensive view of the current financial status and outlook, including projections for the next 12-18 months. This should encompass not only the current financial dynamics but also strategic goals aimed at enhancing shareholder value.
Strong governance is critical, including a small leadership group responsible for deciding on and implementing the action plan, which may include:
- Adoption of a zero-based budget (ZBB) approach to ensure the team starts with a "clean slate" in evaluating key financial metrics
- Detailed spans and layers analysis across the organization
- Competitive benchmarking (where feasible) against key players in the applicable business segment(s)
- Accurate analysis and clear understanding of working capital, accounts receivable (AR), accounts payable (AP), and inventory
- Detailed view and categorization of historical spending trends by business unit
- Headcount trends analysis and business impacts of changes
Successfully driving employee engagement requires leadership to "lay all the cards on the table" in addressing critical pain points, obstacles to efficient decision-making, unprofitable products, services, and geographies, organizational inefficiencies, and areas of excessive costs. Leadership teams should feel empowered to propose radical changes, including potential division eliminations, without fear of reprisal. Prioritize actions that yield the most significant impact.
This crucial discussion should ideally occur in person or via live conference calls, facilitated in a workshop format by an outside trusted facilitator if necessary.
Execute Plan and Shift Culture
Culture is a complex ecosystem within organizations. Companies should proactively work to cultivate a culture conducive to dealing with difficult decisions regarding cost optimization and potential shifts in business operations. Without painstaking diligence around the company culture, teams and organizations are destined to run in place, tire, and fall behind the competition. Business leaders must understand what drives consistent and sustainable high performance in team environments.
Most leaders understand a healthy culture drives success, yet still fail to create and maintain it because they do not address the root factors that shape it. Creating sustainable change is best achieved through holistic, multi-disciplinary thinking that aligns culture, business strategy, technology, and financial performance.
1. Framing
Begin by framing the coming changes in a manner that stirs emotion and motivates team members to embrace the new direction and support the objectives. Clearly communicate the need for change, emphasizing how it aligns with the organization's survival and long-term success – but more critically, with the success of each individual within the team.
2. Quick Wins
Structure work plans to focus on quick wins. Demonstrable changes and associated benefits will rally support and create momentum for future initiatives. Even small changes can successfully showcase the desired cultural shift, create momentum, and encourage the most ardent skeptics to participate.
3. Communication
Drive open and honest communication and leverage all means of communicating with employees. Share opportunities to improve or adjust tactics. Encourage the sharing of success stories and positive experiences linked to the new culture. Peer influence can be the most powerful key to success in driving organizational change.
4. Celebrate Wins
Recognize teams and individuals in their efforts and success stories. Recognition is key to reinforcing desired behaviors. Celebrate those individuals or teams who embody the new culture. Additionally, identify and highlight pockets of innovation that exemplify the shift.
5. Drive Action Orientation
Actions speak louder than words. Cultural change happens when people act. Encourage participation and focus on tangible actions rather than abstract mission statements or structural changes. Regularly assess the effectiveness of the cost reduction initiatives, monitor key performance metrics, and adjust as needed.
Make the Change Last
Executives are under increasing pressure to mitigate the impact of the ever-changing economic environment. Companies must sharpen their focus and proactively manage expenses to avoid the pitfalls that could create serious financial challenges.
The ultimate objectives of a cost reduction strategy include improving profitability, enhancing productivity, boosting customer satisfaction, gaining a competitive advantage, and supporting strategic goals. Do not nibble at the edges. Remember that cost reduction is an ongoing process, not a one-time event. Make the commitment and drive the change required to achieve sustainable results.
Footnote
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
