Sharp Ways to Cut Costs

Harvard Business School Professor Michael Beer says companies need to institute a policy of “equality of sacrifice.” He also reveals what companies can learn from ice cream.
  • Transcript


Michael Beer: Tight times is when you are tested. It's a moment when you can redefine and/or sustain the definition of the firm that you've had up to now. If you are a high commitment high performance firm, you want to make decisions that are consistent with the path you've been on. And if you are not a high commitment high performance firm, you want to see this as an opportunity to redefine the nature of the firm, the relationship between yourself and the employees, the nature of the culture and so forth.

How do you do that? You do not do that by maintaining distance between yourself and those who you know you're going to have to hurt. There's going to be some hurt here.

Some of the policies, are first of all, to try to create an equality of sacrifice. One of the approaches high commitment high performance organizations use is to have a pay freeze, or an across the board pay cut, as opposed to slicing and dicing, and maintaining only certain people and laying off people. You want to maintain as many people as you can. You may still have to let people go, but that's a last stage. And if you do need to let them go, let them go based on the fact that their position is going to be eliminated, what they are doing is going to be no longer central strategically in the organization and it's based on some measure of performance/contribution. You try to maintain as many of the employees as you can.

Take Nucor Steel, another high commitment high performance company, which was born right, they didn't need to transform. What they've done is cut across the board. The steel industry has been horrible. They have been cutting by as much as 50% across the board and making sure that senior leaders has equal sacrifice. Senior leaders are taking that 50% cut and more. Employees understand that.

Secondly, you are trying to get more engagement with people around solving the firm's problems in tight times. So some of the ideas we talked about earlier; bringing people together, giving them a voice about what it is that the firm can do better, both to improve productivity and performance, and also to make their life better.

So, again duality of goals. How do we do things right for people, and how do we do things right for performance.

But engaging people in honest conversation. Here's what we're trying to do. First of all, tell us if we are trying to make sense. Do you have any suggestions? And then engaging them in what the firm can do differently and better.

The argument that I would make is, if you haven't already done that, what you will learn is an awful lot of stuff you should have learned five-ten years ago about how the firm can be improved, and how productivity can be improved. But now you are engaging people in a time of need for them and the firm. And that will make it easier for you, actually, to engage people, as opposed to harder.

All this requires that the leaders engage directly with the people. It can't be done through announcements, it can't be done by sending your HR people to do it, they can be assisting you. You have to go out and talk to people directly.

For example Dreyers ice cream on the west coast, when they had some tough times quite a few years ago, the CEO and some of the leadership team went around to every part of the organization, talked to every employee practically about what the situation of the company was, what was wrong, what the problem was, why they had to make some changes, and then engaged people in discussions about that.