The Briefest Guide Ever on Cost-Cutting

I don’t have to remind any of you about how bad the economy is—the worst in decades. Companies are desperately trying to save money by cutting costs across the board. Unfortunately, one of the things that managers seem to think of first is cutting people. Even the best managers are guilty of that. Back in the early 1980s, with the U.S. economy sandwiched between recessions, Jack Welch (known as “Neutron Jack” for cutting the people but leaving the buildings standing) did that when he eliminated more than 120,000 people in his first years on the job. 

Welch was a cost-cutting pioneer. He was among the first big company CEOs to cut tens of thousands of jobs. Peter Drucker was ahead of his time in despising CEOs for laying off workers by the boatloads while simultaneously collecting multi-million dollar pay packages. He called it immoral and said, presciently, that we would pay a steep price for this level of avarice. He even called it the “death of capitalism.”

But I am getting a bit off topic. This post is supposed to offer a very quick litmus test on deciding on how a company makes a decision on when to cut costs. Drucker has provided the best I have ever come across:

“To start cost cutting management usually asks: ‘How can we make ths operation more efficient?’ It is the wrong question. The question should be ‘Would the roof cave in if we stopped doing this altogether?’  And if the answer is “probably not’, one eliminates the operation.” 

 Drucker also said:

“…Eliminating an entire operation is by far the most effective way to cut costs, and the only one likely to produce by itself permanent cost savings.”

Drucker wrote those words some two decades ago and, for better or worse, this is one piece of advice that got through. Businesses of all sizes have taken this advice to heart and are shutting down whole parts of their companies. This is likely to continue until we have some solid evidence that the deep recession we are in is changing course.

Drucker gave this advice in one of his later books. He wrote many books before imparting these suggestions. He was far more interested in building up businesses than shutting them down. However, he was a pragmatist at heart, and preferred to see companies scale back rather than shut down entirely.   







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