Cost_Cutting

Cost Cutting Summary Downsizing is common practice in both the private and government sector. In an article written for Governmentexecutive.com writers Conrad Ciccotello and Major Steven Green write about the lessons we can learn from the history of industry downsizing. This article reviews the current status of the Department of Defense (DoD), Honda, and the computer industry. Just like any other business the DoD have their own costs to account for especially shaving some of the fixed costs associated with day to day operations. Some of these fixed costs include the salary of employees and permanent staff. During the cold war the DoD was under a constant threat so increasing staff and permanent employees was a must. Though the country is under a threat level most of the activities can be remedied with the use of computers, contract, and temporary employees. The fixed costs associated with permanent employees include a retirement fund, insurance, and time off, by utilizing temporary employees the DoD can save on fixed costs, between 1985 and 1995 the DoD reduced the permanent staff by 30%. As of today the DoD has taken the lead in federal downsizing and starting initiatives to reduce permanent staff positions and rely more on temporary employees and outsourcing. During the mid 1980’s Honda decided to make some major cuts and reduce the permanent engineering staff due to a slump in sales. By removing their ability to develop new technologies in a competitive market Honda began to see a loss on market share. The decision to cut engineer jobs made a huge negative impact on Honda and took years to rebound from this decision. The computer industry is a rapidly changing market that involves definite highs and lows. These current highs and lows are making these technology firms reevaluate their fixed costs and make dramatic cuts. IBM reported that in 1992 they saved $8.3 billion dollars and another $2.9 billion in 1991 by eliminating jobs. Downsizing is typically the byproduct of a company trying to quickly improve its profits and unfortunately the biggest loss for a company is employee benefits and payroll. Downsizing of staff consists of these elements: it is intentional; it leads to reductions in personnel; it attempts to increase the efficiency of the organization; and it affects work processes (Huber & Glick, 1993). Downsizing is often justified as a necessary measure to protect the company from bankruptcy. According to a 1997 survey by the American Management Association (AMA), the most often claimed reasons for downsizing are "organizational restructuring," "business downturn," and "reengineering of business processes." Also according to that survey, downsizing is a decreasing trend: 19% of the 1,200 companies surveyed actually downsized staff in 1996/1997 a number that is down from 27% the previous 12 months, and down from a high of 43.2% in 1990/1991(Hunter, 2007). What is the desired outcome of downsizing' A short-term solution for downsizing is generating better profits with in a small window; unfortunately these profits are short lived. David Estok writes that “a study published in 1994 in Canada by Watson Wyatt Worldwide, a U.S.-based management consulting firm. Of the 148 major Canadian companies surveyed by Watson Wyatt, 40 per cent reported that downsizing did not result in reduced expenses and more than 60 per cent did not experience higher profits after cutting staff. Lloyd Cooper, a consultant at the firm's Toronto office, says those findings are proof that "lean and mean" strategies are often destined to fail. What is more, over half the companies that laid off workers actually hired new staff soon after the downsizing. "I think a number of firms cut too much," says Cooper. "To me, that says the downsizing was often used as another way of performance management. Instead of dealing with people and coaching them, they used downsizing to get rid of them" (Estok, 2010). Jane Atwood writes that,” Downsizing announcements usually lead to positive reactions from Wall Street” (Atwood, 2011). The following table displays a few well known companies and their stock prices the day after announcing they will be downsizing: Company | Announced Cut | Percent of First Day Stock Change | IBM | 60,000 | up 7.7 | Sears | 50,000 | up 3.6 | Xerox | 10,000 | up 7.0 | USWest | 9,000 | up 4.6 | McDonnell Douglass | 8,700 | up 7.9 | RJR Nabisco | 6,000 | up 4.0 | DuPont | 4,500 | up 3.4 | (U.S. News and World Report, 12/20/93) The Wall Street Journal also published what the companies expect when downsizing: Desired Outcome | Percent of Firms That Achieved Desired Results | Reduced Expenses | 46% | Increased Profits | 32% | Improved Cash Flow | 24% | Increased Productivity | 22% | Increased ROI | 21% | Increased Competitive Advantage | 19% | Reduced Bureaucracy | 17% | Improved Decision Making | 14% | Increased Customer Satisfaction | 14% | Increased Sales | 13% | Increased Market Share | 12% | Improved Product Quality | 9% | Technological Advances | 9% | Increased Innovation | 7% | Avoidance of a Takeover | 6% | (Wall Street Journal, 6/6/91) Common Strategies for downsizing Workforce reduction, organizational redesign, and systematic change are all examples of common strategies for downsizing. Work force reduction is the process of illuminating the headcount of employees. Typically this will focus on employees that have the ability for early retirement, transfers, outplacement, buy-out, job banks, and layoffs or firings. This strategy is difficult to predict who will be released of their duties and the skills the company may lose. Organizational redesign aims at removing certain duties in order to remove employees. This strategy eliminates functions, productions by consolidation and merging certain business units. This method focuses on reducing work instead of manpower. Systematic strategies focus on change then organizational system as a whole. First it takes a look at internal systems, values, and communication and then on external systems. All mployees are held accountable for reducing costs and finding improvements. Serving customers, meeting their needs, and exceeding their expectations remain a core goal of downsizing activity, not just size reduction. This strategy is the most compatible with principles of Total Quality Management. Complaints David Estok describe one of the largest complaints about downsizing, “ downsizing often robs companies of their best employees. In many corporations, early-retirement schemes were introduced as the first wave of cost-cutting. The oldest and most experienced employees took lucrative early-retirement packages as corporations sought to "buy back jobs" to meet new employment targets. When that failed to produce the desired results, companies implemented across-the-board cuts, often by requiring each division or department to cut their staff levels or budgets by a specified percentage. "You lose the older people who had the experience," says Gertz, "and you lose the younger people who had the energy" (Estok, 2010). Downsizing has negative effects on the employees that stay on board, typically after downsizing the existing employees feel a sense of poor company moral and suffer from high levels of stress. This underlying sense of negativity can permeate through the company causing loss of production, lack of responsibility, and much inefficiency. Atwood describes the characteristics of the firms that have effectively downsizes as the follows: * Involvement of all employees in improvement and participation in down Sizing * Downsizing viewed as an opportunity instead of a threat * Individuals defined as resources to create organizational improvement instead of costs that dragged down bottom-line financial performance * Advanced quality culture. Most effective organizations had dynamic, competent, knowledgeable leaders who voiced clear, motivating visions of the future. These company characteristics are not enough the manager has to have the ability to excite and motivate their team, understand the value of praise and use symbolism to demonstrate the future possibilities. Six “Best Practices” for downsizing Jane Atwood, Ethel Coke, Christine Cooper and Kendra Loria have identified in an the article “Has Downsizeing Gone Too Far'” the six best practices for downsizing. First, downsize from the top down Allow employees to analyze job-by-job and task-by-task operations of the firm, and identify redundant jobs and ways to eliminate organizational fat and improve efficiency. Downsizing from the top down provided consistency, vision, and clear direction; downsizing from the bottom up fosters innovation and improvements. Second, Implementing across the board cutbacks captures employees' attention, mobilizes the energy of all the organization's members, and overcomes resistance to change by high lighting the seriousness of conditions faced by the firm. This makes it clear that the status quo is no longer acceptable. On the other hand, this approach produces negative characteristics that can be overcome by a selective strategy. Third, managing the transition for employees who lost their jobs and the transition for the survivors, the most successful firms offer out-placement services. Huber and Glick write, “At times the employees that stay experience a feeling of guilt and management burnout due to increase team size and work load. Fourth, The most effective processes involved working on any processes that stood in the way of internal efficiency. Redundancies, excess costs, and surpluses were targeted directly. The best downsizing practices also included the entire system of suppliers, customers, and distributors in planning and implementing downsizing. Fifth, successful downsizing created small, semiautonomous organizations, as well as large integrated organizations. The most effective downsizing was associated with the advantages of both small and large organizations. Unit leaders were given the responsibility to manage functions previously centralized at headquarters. At the same time, effective downsizing produced efficiencies by centralizing functions and creating large organizations. Sixth, the best downsizing practices emphasized downsizing as a means to an end, as well as the end in itself. On one hand, the most effective organizations targeted downsizing as a central critical outcome, but also expanded their alternatives to achieve effectiveness. "Improving productivity" and "enhancing competitiveness" were labels that helped position downsizing as just one in a portfolio of strategies that could improve firm performance, (Huber & Glick, 1993, p. 56).