The big downsize mistake

Thinking of cutting costs or downsizing? Count to 10, and then read this… LOUIS COUTTS

By Louis Coutts

In management, there are two events, one being controllable and the other uncontrollable. Theory is that as we cannot do anything about uncontrollable events, such as the economy, we should spend our time on events that we can control, such as costs – and that is what a lot of businesses are doing.

Businesses are indulging in cost cutting, and in particular “downsizing”. Makes a lot of sense, but it could result in missing opportunities to work on other controllable events such as market share and sales.

Think about cost cutting for a moment. Where do you start and where do you stop? Just imagine an equation where factors have a range of values. For instance, E (employees) can have a value of 0 to infinity. E multiplied by 0 is zero, so if you have zero staff you are likely to have zero sales, and if you have infinite staff you are likely to have significant sales, but at an enormous loss.

Somewhere in between you will find the most effective values. This means of course, that if you go too far in cutting costs, you will risk losing sales. How do you find the right balance?

The short answer is that it is guess work, but the evidence seems to suggest that most companies that get heavily into “downsizing” generally go too far and suffer.

Boeing Corporation is an example. Over the past 13 years they have had four very serious strikes, including a recent strike (principally about job security) which has cost them an enormous amount of money in lost production and are now some years behind in delivery of their new beaut 787.

Not only that, they have surrendered the position of market leader to Airbus, which had zero percentage of the commercial aircraft market in 1970 when Boeing enjoyed a 70% share of the market. Can you imagine the billions, no! hundreds of billions Boeing has lost to Airbus?

Irrespective of whether there is an economic downturn or upturn, the fact is that there is a market and businesses participating in that market have a share of that market. If a business downsizes according to the decline in the market, the best result it can hope for is that as the market declines, it will have the same share of a reduced market – and when the tide turns, it will have the same market share of an increased market.

So, what happens if a business in a particular market does not downsize but maintains its well-built team of people to aggressively attack the smaller market in order to gain market share? It could take the opportunity to increase its market share and maintain sales (albeit at discounted prices).

Suppose its market share before the downturn is 20% and because of its aggressive participation in the market, and by maintaining its team of people in which it has invested so much, it improves its market share in the downturn to 30%. When the good times come again it is looking at having 30% of an increased market!

There is a tendency in times of economic downturn to think in terms of cost and sales rather than in terms of cost and market share. By concentrating on cost and sales, there is a real risk that cost cutting will go too far, and this can result in reduced market share.

A lot of businesses have gone to the wall as a result of his strategy. They might survive the downturn but when the market turns, they find that the trend in the graph of their market share continues in a southerly direction until they are under water. The irony is that they then go belly up in the good times.

Cost cutting is a risky business, particularly if a lot of effort has been contributed to building a team of dedicated loyal staff. The real difficulty is that little is known about an accurate formula to determine precisely where to start and stop.

The safest course is that if you feel you already have a pretty efficient organisation with dedicated loyal staff, count up to 10 before you decided to “downsize” and then think again about how you want to look when you come out the other side of the economic chasm.

Louis Coutts left law and became a successful entrepreneur. His blog examines the mistakes, follies and strokes of genius that create bigger, better businesses. Click here to find out more.

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