In A Downturn, Include Your Employees in Cost-Cutting Decisions

This article first appeared in Harvard Business Review on May 6, 2020.

Almost every business is reorganizing its operations in response to the economic slowdown caused by the Covid-19 pandemic. Often, companies take a top-down approach to resizing based on a limited set of data such as earnings forecasts and competitive benchmarking. But following this playbook usually results in “wrong sizing” and demoralized employees.

Instead, leaders should redesign their operations based on data provided by their most valuable sources of proprietary insights — their employees. Democratizing the collection of data and recommendations allows leadership teams to gain a much clearer picture of activities and initiatives underway within their organization. It also offers a more detailed lens through which they can evaluate which activities are the most valuable to achieving strategic objectives and which ones can be automated or managed in a shared services environment — or ceased.

When leaders take this bottom-up approach, we have found they not only cut costs significantly but also realize their goals more rapidly because managers and employees are motivated to help. Changes are then also more likely to stick.

Leaders should redesign their operations based on data provided by their most valuable sources of proprietary insights — their employees.

By supplementing one leadership team’s top-down analysis with qualitative and quantitative data from vice presidents, directors, and employees, one fast-food restaurant chain was able to reduce its sales, general, and administration costs by more than one third and refocus on core strategic areas, such as marketing, product innovation, and new franchises. Likewise, a hospital group uncovered ways to improve clinical and administrative team interactions, making it possible to treat more patients across specialties, while reducing operating costs by more than 20%.

In both cases, leadership teams were able to transform their companies because they based decisions on more accurate information. But how can leaders be sure that they are collecting the data they need?

Below, we recommend focusing on four different types of information:

1. Key routines and projects. The first step in redesigning a company is for the leadership team to ask each head of a division or function to create a list of 20-30 routines and projects that are fundamentally important to the company. Routines are repetitive by nature and can range from daily to quarterly. Projects, such as the deployment of a new support system or the launch of a new service line, have a specified beginning and end.

Gathering this data can enable a company’s leadership team to see the activities and projects underway at a more granular level, making it possible to spot gaps and redundancies quickly. For example, one company we worked with discovered several hundred of its global sales and marketing employees attended conferences to sell products in spite of low success rates. Another found salespeople repeatedly visited the same client because salesforces were not coordinated. Yet another leadership team uncovered that three times as many IT projects were underway than had been budgeted. And on and on.

2. Effort required. To help a leadership team better understand the effort required for every identified routine and project, division heads then hold workshops with their managers to discuss the volume and nature of the work involved.

Operational data supplied by employees permits leadership teams to evaluate precisely which routines require more or less support. One leadership team may discover armies of people are executing the same basic support tasks after a series of acquisitions — like IT, human resources, legal, finance, and government relations. Or, at the other end of the spectrum, more people may be needed to carry out critical responsibilities. For example, food and pharmacy retailers may have to ramp up staff to fill and deliver online orders, which have soared from five percent to nearly 40% of many companies’ sales during the pandemic.

3. Strategic priorities. After this exercise, division heads should then ask managers to work with employees to tag identified routines and projects based on the strategic priorities of the company and their own division. These tags should be sorted into three categories: “core,” “context,” and “cease.”

Core routines and projects are a company’s top priorities. These are capabilities that companies may want to invest in to differentiate themselves from the competition to spur future growth, like research and development in the pharmaceutical industry, design in the fashion industry, customer experience in retail, and capital expenditure management in heavy industries like transportation and manufacturing.

By contrast, context routines are standard services and activities that can be de-prioritized and optimized to be more efficient, often by sharing or automating services. For example, managers at one retailer pointed out that one team could scout the world for new fashion trends in men’s shoes, women’s shoes, and accessories — instead of sending a separate team for each product. One human resources department’s recruiting function suggested a chat bot could handle basic questions and answers from online job applicants, freeing up employees to focus on the interview and hiring process, speeding up the pace of new hiring.

Other routines should be categorized as cease if they are adding little value or no longer relevant to a company’s strategy. For example, one retailer halted the preparation and distribution of most of its management reports by the finance function. Only a few managers found them useful even though they took up most of the team’s time and effort. A pharmaceutical company identified unprofitable product lines that could be retired, freeing up about 40% of the research team’s time to develop new products.

4. New operating model ideas. Next, leadership teams should empower division heads to work with managers and employees to begin to redesign their operations by pinpointing which capabilities should be built up in order for the company to bounce back and grow. Managers should crowdsource not just the operational data they think they need to achieve new efficiencies, but also innovative ideas for reinventing their operations and their offerings for the future.

By including this data from employees in the process, leadership teams can then pursue more ambitious visions, since they will have both the significant savings and the talent they need to execute their plans. Retailers will be able to pivot and offer much more elaborate shopping experiences online, complete with “magic mirrors” that let customers try on shoes or apparel virtually and touch screens that tell them which store has them in stock. Grocers and pharmacy retailers can invest in digital networks that allow them to nimbly redeploy their workforce by sending them alerts when there is an opening for someone to work in a different store, or branch, or stock room. Transportation companies can reallocate their scarce resources to developing more efficient ways to deliver packages from their warehouses to customers’ homes. And pharmaceutical companies can ensure a brighter future by developing new products and services at a faster pace, transforming innovations like new vaccines or treatments into the bread-and-butter products of tomorrow.

By tapping into data provided by managers and employees to redesign a company, leadership teams will not only be able to make better decisions — they will also be able to improve their operations, and still have workforces engaged and motivated to continuously improve them.

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