Cuts Made Simply for Cost's Sake May Backfire

Ann All

When I interviewed The Hackett Group's Erik Dorr and Honorio Padron earlier this year about the gap between IT supply and demand, one of the timeliest topics we covered was discretionary cost cutting, something many IT organizations are doing, some in order to help their parent companies stay solvent during the recession. The problem is, as Padron told me, such strategies are "unsustainable."


Not only that, but a recent survey from Canon finds cost-cutting strategies may not even be that effective. Thirty percent of the 1,800 senior decision-makers said they had changed their processes simply to cut costs, while 59 percent tapped increased efficiency as their reason for tweaking processes. Yet only 19 percent saw an increase in efficiency savings, and 45 percent said they experienced savings of less than 5 percent.


Does that mean organizations shouldn't focus on cutting costs? Not at all. But it's important to make discretionary cuts in tandem with process changes and also to remain cognizant of possible unintended consequences. Said Dorr:


...If you are already a fairly well-run and efficient operation and you take something out, then clearly it is going to impact your ability to deliver services. And that is not just people. If you deicide to postpone an upgrade cycle of a piece of hardware, it may come back to bite you if that hardware goes down. You may try to save some money on software maintenance in the short term and end up paying for it later. A discretionary cut without a fundamental change is going to hurt your ability to deliver service down the road.


It's generally appropriate to make cost cuts and accompanying process changes in response to a fundamental shifts in the business. (And those are certainly occurring now, although it may difficult to discern whether shifts are permanent or temporary.) Dorr told me:


Of course, there are instances where you know for a fact that there is a reduction in demand that won't be coming back. An organization like Citigroup, they lost a lot of IT staff because I think they realized, "Sorry, we aren't going to be doing this in the future." In those instances, you just need to fundamentally scale back your organization. If the resizing of the IT organization is a reflection of what is happening with the business, then it may be sustainable. If however, the business is going to dip because of a reduction in demand, but the organization is still going to execute a long-term strategy, you may not be able to support those long-term goals if you cut IT back too much.


There is some good news in the Canon survey. Thirty-seven percent of respondents are considering adding more staff, and 30 percent intend to increase their training budgets.

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Add Comment      Leave a comment on this blog post
Sep 20, 2009 4:55 PM Roman Tull Roman Tull  says:

I really agree with you, I remember when Bell South Laid off 4,700 employees in one day - just to cut labor costs and to try to up the value of their stocks for the CEO's and their stock options. 

Look where it got them...no where!  There stock never rose, it dropped, and eventually they were bought out by their biggest competitor AT&T who they had been planning on buying out.  AT&T didn't have any underground cabling, so they had to lease it from Bell South or go strickly to the cell phone market.  That they did, and they eventually beat out Bell South all together!

Go ahead and lay off your employees, it just might bite you in the END!

Liked your Blog!


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