Why Cut Wasteful Spending Only in a Downturn?

Downturn Forces Cutbacks Big and Small – WSJ.com

There's a lot of town during any downturn about cutting costs in businesses or organizations. Often, the talk is about “cutting heads” — a cruel way of talking about firing people. Or, organizations clamp down on “non-essential” spending, such as travel (a favorite category and one whose “non-essential” status is dubious, especially when focused on travel for training that's already been paid for).

Lean, to me and many others, isn't primarily a “cost-cutting” strategy. It certainly isn't a layoff strategy — Lean requires employee involvement and using Lean to drive layoffs will kill that employee participation. Ergo, you shouldn't use Lean to drive direct firings. Lean can be used as a growth strategy, through improving products, service, or quality. But I digress.

Back to cost cutting. I'm not saying cost cutting is bad. Not at all. We shouldn't spend money unnecessarily when it's company money, regardless of whether we are in a downturn or not. The WSJ had an article last week (linked at the top of this post and here) about companies that are tightening their belts in tough times.

Some examples of cost cutting:

• Asking employees to mow the lawn to avoid using a service
• Switching to black ink instead of color on the company letterhead
• Insisting on double-sided printing and copies
• Clamping down on unnecessary color printing/copies
• Cutting back on food or snacks for office staff
• Sending fewer products and salespeople to large industry conventions
• Reading online news instead of paying for print magazine subscriptions
• Cutting incentive gifts ($10 gift cards) for staff

Some of these cost cutting moves could be debated — what if saving a few bucks on snacks destroys staff morale? Maybe it shouldn't, but it could. The one company profiled in the article actually backed off on the snack-killing plan after employees complained. Asking employees to mow the lawn might constitute a “waste of talent.” What if staff could generate more sales or cost savings in the real business, given that time? Maybe it's actually “cheaper” to hire a lawn service?

Some of the cost cutting moves might hurt sales — such as scrimping on sales travel. But maybe there are methods like online meetings that could be used instead and might actually be effective when companies are flush with cash.

Cutting incentives… now that's a pet issue for me. As a Deming disciple, I question the impact of individual incentives and “employee of the month” competition prizes. Maybe the company should kill those incentives (which often cause dysfunctions) regardless of economic conditions.

Whatever the verdict on any of these costs, the question I'd ask is this:

If it's “waste” and “unnecessary” now, why not always??

I think some of the answer to that question is how companies “manage” earnings. Wall Street and investors often want consistent profits or consistent growth in earnings. If a business normally has some cycles and “common cause” variation in its sales or profits, profits might naturally fluctuate around some mean (or growth rate). In periods when profits might be “too high” there might be an incentive to actually waste money. This prevents profits from being too high, this preventing disappointment when profits aren't as high in the next time period.

There's a lot of “tampering” with costs in the name of keeping profits stable. Deming taught us that tampering with a stable system actually INCREASES variation. I wonder if the same is true with profits?

Companies like Toyota seem to have a pretty consistent aversion to waste. Toyota is often described as a very “frugal” company. Even with HUGE profits, they're a “cheap” culture, people say. This is often attributed to the rural roots of the Toyoda family (and the company) and the severe lack of resources after World War II. Toyota couldn't afford to waste money, so it's embedded in the culture, right?

The WSJ also had an article asking, about individuals, if frugality or miserly behavior is innate or learned — “nature” or “nurture”?

Are we born cheap or made that way? It's a tough call.

The researchers are mixed:

Scott Rick, a postdoctoral student at the University of Pennsylvania's Wharton School who has done research on what makes people cheap, says that childhood plays a big role. If you have two thrifty parents, you're likely to be thrifty as well.

Likewise, people who lived through the Great Depression were often thrifty their entire lives. Since the 1930s, each successive generation has gotten to be more free-spending.

The current financial crisis could change that. “Right now, there are probably a lot of children who are going to be tightwads,” says Mr. Rick.

But our childhood isn't the only factor. George Loewenstein, a professor of economics and psychology at Carnegie Mellon University, says people have innate tendencies. “It's almost like people are born tightwads or cheapskates,” says Dr. Loewenstein, who published a paper on the subject with Mr. Rick and another author.

What do you think? Are some companies innately frugal? If so, why? The founders? The current CEO?

Is your company “cutting costs” in ways that are really hurting your business? Are they “saving money, no matter what it costs us?” Does Lean enter into any of that discussion in your organization?

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