Why Cost Cuts Fail to Last

The research on cost cutting programs shows that only
about 10% of such programs are still in place 3 years
later.

The biggest problems with getting cost cutting programs to
last are:
**Most programs don’t address the true drivers of costs.

**Managers lack the deep insight into their own operations
to create sustainable cost reduction programs.

**Many managers have a “knee jerk” reaction to tough times
and use draconian measures which fail to distinguish
between cuts that add value and cuts that destroy value.

HR CONTRARIAN POINTER: The above 3 problems with cost
cutting are part of a classic Systems Theory behavior
titled, “Fixes That Backfire.”

With “Fixes That Backfire,” the solution to the problem
tends to address the symptom rather than the underlying
problem.  Once the symptom is addressed, the situation is
resolved in the short-run, but comes back with more
devastating results in the long-run.

Downsizing to Improve Profits is a typical “Fix That
Backfires” as reflected in the following sequence:
1. Symptom/Problem: High costs that lower profits.

2. The Fix: Lay off staff.

3. Result: Profits immediately improve.

4. New Problem: Fewer staff means a larger workload for
others.  As workload increases, quality problems occur,
costs increase due to rework, and fewer sales from
customers, both of which reduce profits.

5. The Fix: More layoffs since it seemed to work the first
time.

Without ever addressing the root causes of the cost/profit
imbalance, the company will eventually solve the poor
quality and declining sales problems by adding back
multiple costs relative to labor, sales, advertising, etc. 

With thinking such as this, is there any wonder as to why
90% of cost cutting programs fail?

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