Friday, January 16, 2009

It is amazing how easy it is to be a contrarian these days.

The media seems to have entered a contest on the gloomiest prediction ever made and there is no other news in the world but outrageously bad earning reports, layoffs here and there, plummeting commodities and revelations of unscrupulous financial management.

I am writing this on a train on my way to a client meeting. Sipping my coffee, I have flipped through the in-travel magazine that the railway company so thoughtfully placed in the seat pocket in front of me, which talks mostly about cute animals, nice restaurants and places one ought to visit. And what do you know, even this little thought-provoking gem of fine critical journalism commences with the editor-in chief?s somber assessment: ?We are living in uneasy times?? (I am being sarcastic calling it a gem, just to clarify)

The stock market is vacillating, much as if it had a bipolar syndrome, elated one day on a positive blip of news; severely depressed the next on reports that a mail room clerk half a world away caught a cold. Senior executives around the world appear to be just as prone to being at a loss in the face of such uncertainty as a junior trader at a Russian or Brazilian stock exchange, who never though that major country indices could actually go down? let alone lose two thirds of their value.

It is at the times like this that many businesses embark on a rampant emotion-driven cost cutting, which I refer to as ?running with scissors.?

Look at the income statement of any organization and you will see that the bottom line results are a product of subtracting expenses from revenues. Increasing the revenues or even maintaining them, when the economy tanks, is difficult because it is seen outside of the company?s control. Innovation, strong marketing and superb leadership are required and there are a lot of unknowns in all of these.

Expenses, on the other hand, are a no brainer because they are entirely within the organization?s control, and so, if there is a danger of revenues going down, there is a quick and simple way to keep the bottom line in the black by cutting expenses.

And so, just in case, companies stop spending money.

Running with scissors, cutting out expenses without much forethought, plagues organizations. Senior and middle management cull projects and lay off people, with ostensibly little strategic insight. It really gets silly at times, like in this large company I happen to know well, which replaced a contract project manager on one of its business critical projects with a full-timer with no knowledge of the project, who became available due to cuts to the company?s project portfolio. It would seem like a reasonable move, if it weren?t for the fact that the replacement happened 10 days before the implementation date. The upside: savings of approximately $10,000 in project management fees. The downside: a distinct possibility of derailing the project, an impact with the price tag in the millions of dollars. The old saying about being penny wise and pound foolish comes to mind.

Running with scissors hurts and injures in more ways than one.

First, it hurts those who lost their income because it was easier to kick out a few people than to do the difficult work of figuring out how to sell more.

Second, it hurts those employees who remained behind as often they have to absorb the workload of those who were let go.

Third, it hurts customers who have to put up with lower quality of service, as there are fewer people available to help them.

Forth, it really hurts the organization, which, instead of investing in value-generating projects, and working hard to overcome the stunned competition and raise its market share, just hunkers down and waits until the sky clears. No wonder champion businesses emerge at the time of such slowdowns, just to get stronger and trample over the competition when the economy picks up (as it always does). Injuries may be fatal to those who choose to run with scissors instead.

Fifth, running with scissors greatly exacerbates the objective economic slowdown. If every organization were to cut its spending, the impact to the economy would be devastating: cancel a construction project ?just in case? and the construction company won?t be buying bricks and cement, upgrading its equipment or hiring the construction crew. The effect precipitates from there: a construction worker now won?t buy a new TV, brickworks will cut its production down, most staff will defer a long-planned vacation, and so forth. It is said that recession often feeds on itself.

Sometimes, tightening the organizational belt is simply necessary. I am sympathetic to companies that face insolvency and are forced to embark on a last-ditch effort to survive.

I am also all for prudent financial control and measured spending, at all times, good and bad. However, we need to guard ourselves against the urge to run with scissors.

Even my three years old daugter knows that it is dangerous.