Common Cost-Cutting Responses to Recessions: an excerpt from “Winning Now, Winning Later”
Common Cost-Cutting Responses to Recessions: an excerpt from “Winning Now, Winning Later”

Common Cost-Cutting Responses to Recessions: an excerpt from “Winning Now, Winning Later”

To help you think through pros and cons of various cost-cutting initiatives during the turbulent times, David M. Cote, former CEO of Honeywell, has compiled a list in his latest book Winning Now, Winning Later.

Cost Categories Pros Cons
Direct Material If you can get price reductions from suppliers, terrific! It’s tough to do, as most companies have contracts in place with suppliers.

The impact of these cuts are delayed if you have to go through an inventory account.

Indirect Material This is a great move because by reducing usage, you cut costs immediately. As long as these cuts don’t impact customers, they’re fair game.
Temporary or Contract These cuts lower your costs immediately. The work if you always maintain a small portion (10-20 percent) of your workforce as temp/contract while observing applicable state/federal laws regarding classification. You have to keep an eye on legal classifications.
Layoffs These cuts affect only a small (10-20 percent) of the workforce. The financial returns aren’t great.

Your organization will accrue a big expense upfront, with the potential for survivor guilt among remaining employees.

Layoffs hurt your industrial base, compromising your ability to respond during the coming recovery.

Furloughs These are a lot less costly in financial terms.

They preserve your industrial base for recovery.

When recovery begins, employees feel better about it.

Furloughs affect 100 percent of the workforce.

They’re difficult to administer because laws vary in different states and countries.

Benefits Employees don’t feel the effects of benefits cuts immediately.

The cost savings show up quickly in company financials.

Employees won’t like benefit cuts, but they’ll recognize the cuts are better than furloughs or layoffs.
Depreciation/Amortization As long as it doesn’t affect customers, it’s much less painful. Difficult to impact because most is driven by past expenditures.
Bonuses Employees see bonus reduction as essential, a sign that ‘we’re all in this together”.

Cuts in bonuses have an immediate impact on financials.

Leaders feel like they’re working harder than ever for a lot less. You can minimize resentment by finding a way to help leaders over time (for instance, issuing bonuses in stock.)
Direct Support to Customer Cuts in customer support have an immediate financial impact. Customer impact cuts are a really bad idea, as they could cause customers to flee, hurting you over the long term.


Bonus: Four ways to take control of the recession

First, if you have a public company, manage investors’ expectations. When making earning estimates, be conservative. You can’t know how bad the downturn will be and you need some wiggle room in case sales come in even lower than you anticipated.

Second, when making big decisions like cost-cutting, work collaboratively with other leaders to make sure they’re on board. You can’t dictate a solution and expect everyone’s buy-in. Instead, put the conundrum you face, as well as your recommendations before your team and let them come to their own conclusions.

Third, communicate openly and honestly. People must hear the truth about how your business is doing. If you present an overly rosy picture at the outset, you might have to go back and explain the situation yet again when sales have dried up further. At the same time, don’t pretend you know for certain how bad recession will get because you don’t. Acknowledge the pain people feel, reassure that recession will eventually end and recovery will begin, and all of them will be better positioned to succeed given the difficult actions being taken today.

Fourth, maximize the cash available to you. Cash is always king especially during the tough times. While David wishes he hadn’t done the stock buyback right before the recession hit, they were still in a very good cash position then, and they did a great job of generating cash during the recession.