Gutting Costs Guts Viability

The popular media and trade rags are filled with stories about downsizing and cost cutting. IT, as usual, is one of the first business units to be affected—budgets being cut, projects cancelled, placed on hold or de-funded. Labor, always a large component of the IT budget, is being cut as well and that means that people are either finding themselves moved into a roll with a decrease in pay, forced into early retirement, or outright dismissed.

These are always the first knee-jerk reactions to tough times. This predictable management response can gut a firm, giving rise to fear uncertainty and doubt (FUD) both within the organization and from vendors and customers. So, why does management pursue this course of action over and over? Because cost cutting, especially staff reductions, is a dependent variable that they can readily control and something that can be accomplished very quickly. After all, it’s relatively easy to highlight a part of the org chart and hit delete.

In algebra, we solve equations comprised of variables. The linear equation of y=mx+b gives us an opportunity to review two types of variables: dependent and independent. Y is the dependent variable because its value depends on solving the equation and the inputs of m, x and b. Those last three variables are independent variables because their values are not beholden to the value of y; assuming we are solving for y of course.

When we are looking at organizations, we can classify their approaches as focusing on a spectrum of independent and/or dependent variables. The news reflects a current overemphasis on dependent variables. Yet, cost cutting is not a long term strategy. It is, at best, is a short term tactic. In observing behavior and outcomes we can class cost cutting as a dependent variable because there are limits to how much cost can be removed from a system and still be viable.

History is littered with stories of organizations that cut costs to the point that innovation and the ability to respond to the market were curtailed. Ultimately, these firms ceased to exist. Imagine a products firm that lays off all its engineers and marketing functions, for example. From where will new products and communications about those products come? If these functions are outsourced, at what point will relevance no longer be sustainable? The mantra of supporting more with less is repeated so much as to be wonderful fodder for comic sarcasm.

There is Another Way

Rather than focusing on cost cutting, there is another approach, one that doesn’t have limits. For capitalist organizations, which are where we will focus our attention, it is sales or, what Goldratt would term “throughput.” Sales, in contrast to costs, are independent variables. There aren’t limits to how much sales can be generated. In fact, arguments of sales not being possible are reflective of management’s inability to effectively penetrate existing markets or develop new ones.

In a down economy like today’s, selling the same products the same way may no longer work. Companies need to change, they must change. It’s that simple. But with that “simple” understanding comes real effort in the areas of planning and execution. Both of these disciplines, while studied and covered for years and years in the trades, are still poorly implemented.

There is a huge difference between a market being unwilling to buy a current product or service and management’s inability to innovate and bring new products and services to market. Stuff happens. The world and markets change. Buyers change. In response, product and service offerings must change. The ability to rapidly innovate and bring new products and services to market is critical.

Management teams that are focusing on cost cutting risk the future of their organizations. There will be opportunities during the recession for groups that are ready to seize them. Firms that have gutted their ability innovate and compete will find themselves irrelevant in the market and either languish or outright fail. Instead, they must focus improving throughput and reducing operating expenses simultaneously.

By the way, CIOs, if you want to be involved in executive decisions and business strategy, now is the time to step up. Help the business by creating and maintaining IT services that enable the creation and protection of value based on goals. If there are IT activities that can not be clearly tied to goals that matter, they should be cut. The resources used on services that are more material in terms of enabling and protecting more functional areas. This is the definition of productivity.

George Spafford is a principal consultant with Pepperweed Consulting and a long-time IT professional. George’s professional focus is on compliance, security, management and overall process improvement.