Wednesday, August 8, 2012

Cost

I don't talk a lot about business on this blog. Which is not because I don't think a lot about it. I think about it for a good chunk of each day, so this blog documents* what I do to escape that. Today I'm making an exception.

*Or rather used to document, since I haven't been documenting much of anything lately.

Last week my company laid off a bunch of people. Most of them are hard-working people who do their jobs well and did their best each day to contribute to the company's success. I wasn't involved with the decisions, so I don't know the specific factors except that the group affected is a mature product whose plans for growth have failed to meet expectations.

One of the best classes I took in business school was a corporate strategy class focused on decision making in a competitive market. As we analyzed case studies, the professor forced us to demonstrate how a given strategy decision would either increase revenue or decrease cost. The point being that as a manager, if you can't show how a decision will either increase revenue or decrease cost, you can't justify making that decision.

Further, a one dollar reduction in cost results in a one dollar increase in profit, whereas a one dollar increase in revenue increases profit by only a portion of that dollar because you have to factor in the incremental cost of earning the incremental dollar. Therefore, all things being equal, if you have the choice between decreasing cost or increasing revenue by the same amount, you're better off decreasing cost.

In today's software industry, there are effectively no manufacturing costs other than people. Which means in many cases, the only cost saving lever managers have to pull is headcount reduction. It's the only lever many executives know how to pull anymore.

Unfortunately, in some organizations, it's pulled too often. So often that the dollar in savings doesn't result in a dollar increase in profit. Employees who come to work every day with the fear it could be their last will never give you their best. They'll use company resources looking for other jobs, even if a threat to their current job is not imminent. They'll spend time during their workday blogging about the detrimental effects of layoffs.

We all understand the rational notion that if we work hard and contribute to a company's success, that success will increase our own job security. However there is a tipping point: if employees believe that no amount of hard work will ensure employment for as long as they want it, then the organization is fundamentally ill. If the same company has management that knows no way to align cost and revenue other than reducing headcount, this illness can be very difficult to cure.

4 comments:

  1. in my experience (and i have way too much of that) these decisions are usually a precursor to other business decisions that indeed will increase the bottom line. "Mature Product" can easily have a large number of redundant and unnecessary resources attached. Again, in my experience.

    It sucks, for sure, but, it does get better.

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  2. It's the suck-out-the-cash-and-drown-it business model. Wish I could say that I don't know what you're going through.

    (P.S. I just spelled wish as whish. What a doofus.)

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  3. Bob, I'm no stranger to layoffs. This is not a business that's going to get better--as Rabid said, they're just sucking out the cash while they can. This is the third round of layoffs in a year and the deepest of the three. They have passed the tipping point where people actually believe that hard work will result in job security.

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  4. It's too bad publicly traded company's tend to live and die on what they can get accomplished in 90 days. (If my small little company operated that way I would have blown it up 12 years ago).

    I recently read a pretty good explanation of this whole mentality by a pretty savvy blogger here: http://www.skibikejunkie.com/2007_12_01_archive.html (I think it's worth a re-read)

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