Business strategy author Gary Hamel offers tips on how to cleverly cut company costs without jeopardizing your future.

Topic: Look at data

Gary Hamel: When you're going to cut costs, start with data.  Which businesses are under-performing?  Which product lines are under-performing?  Which people are under-performing?

What I think often happens is that companies hope for some natural process of attrition.  Things start to get difficult, they kind of take across the board cuts and that's almost never a good idea.  I remember just recently, I was having a conversation with a CFO in a large company and they had a blanket policy that every division, every national organization, was going to have to take down head count by 10 percent.  And I said, "This is across the board?  No exceptions?"  No exceptions, everybody has to do it, it's a mandate.

I said, "Well, surely that can't be the right way to do it."  I said, "You know, you have divisions that have great growth prospects, you have others that have grown fat and lazy.  Why just do it across the board?"  And he said, "Because it's fair."  I said, "How is that fair?  I mean, you know, some business is already lean, some isn't, how can that possibly be fair?"  He thought a minute and he said, "Yeah, you're right, but it's easy."

Well, easy is usually not a good criteria for making a business decision.  So the starting approach for any kind of smart cost cutting, is really a very, very careful analysis of what's grown fat, what's grown lazy, where do we have great prospects, where do we don't?  But cost cutting should never be uniform and across the board, number one. 

Topic: Talk to people

Gary Hamel: Number two, I think in smart cost cutting, you spend a lot of time talking to people about what's happening.  Clearly some people are going to have to go. How do you avoid demoralizing all the folks that are left?  First you have to be honest about what's changing in the environment.  That's not too hard at the moment, most people get that we're in a very, very deep recession.  But you also have to have a due process and make sure that in the heat of trying to bring your costs back in line, you're not indiscriminate in how you let people go.  That you're taking people one at a time, you're really evaluating their contribution, they understand what it's that person and not the person next door to them that is being asked to leave. 

And when you have to cut deep enough so you feel that you're cutting, you know, not kind of the slack, not the B team, but you're cutting people out of the A team, you also want to let people know that you're going to be re-hiring, that you're going to want to re-engage them.  But do the whole process in a way where you've not destroyed their loyalty, their emotional connection to the firm.  That means explaining why it's happening, being sure that they understand why it's—you know, why certain people not other people, and if you can, giving them at least the hope that there is a re-hire when the economy starts to pick up.

Do all of those things and I think you can get through a lot of the cost cutting, without it undermining the morale in your company, or without finding that you've kind of cut off some of the most valuable people that you've, eaten the seed corn, as it were, inadvertently in the midst of a crisis.

Topic: Know when to hold ‘em

Gary Hamel: So I think you have to be very, very careful in the way you do this and you have to recognize that recessions are temporary.  We've come out of every one, you know, during our lifetimes, we're going to come out of this one and what you often find is that the companies that had to cut less deeply, that were able to kind of soldier through, did not lose key resources.  Did not bring their key capital projects to halt. Those are the companies that gain market share on the upturn.  Because it is really hard to re-hire talented people- it takes a long time to find them, to bring them back on board again, make them productive.  It takes time to get those capital projects underway again.

So if you can find ways of cutting less deeply through the depths of the recession, you absolutely have an advantage coming out of the recession.  It's also true that, you know, some companies over-hire and I think this is usually kind of a political thing.  In most organizations, we measure people's authority and status by the size of their budget and the size of their head count.

There's kind of an imperial instinct that people have, they want bigger teams, more people and so on.  And so you have to keep that in check, you know, you have to keep constant attention onto all those key productivity measures and make sure that at no point, as you grow, do those things get significantly out of whack.  if you're in a fast growing market, you're a fast growing company, you have to hire a bit above the demand curve, because it takes awhile to bring people on board and get them up to speed.

But you want to watch those ratios very, very carefully.  Make sure that they never get out of line, that you at every moment, through the down and the up curve, are paying attention there.  If you stop paying attention for a moment, it's very easy for people at all levels of the organizations to pad their teams with more people, to hire a bit indiscriminately and then you suddenly find out that when times are tough again, you have a lot of slack and you're going to have to put the organization through a lot of trauma to get rid of that.

So be careful when you hire. Don't over-hire, but also be careful not to over-cut, because coming out of the recession, the ones that have been able to maintain kind of the employment status, the capital programs, they're going to be the quickest to ramp up growth and grab the market as it emerges, as we come out of the recession.

Recorded on August 15, 2009