Not long ago I asked one of our execu-
tives to step in and turn around division that had been mysteriously losing money for few years in row.
His first impulse was to slash overhead and control costs. noble goal I thought, but everyone was telling me that the division’s expenses were cut to the bone. I wanted him to focus on increasing sales. That was the right place to start.
This executive startled me little by telling me I was wrong. In effect, he was saying to me, “Hey Mark, let me do my job. You trusted me with this assignment. Trust me when I tell you that costs are the place to start.”
As I thought about it, I could understand why we weren’t seeing eye to eye.
Every manager faces two options in turnaround situation. Contain the outgo, or improve the income. It’s hard to do both. You can’t improve revenues without spending money — and concomitantly, you can’t cut costs as you increase spending. In the end, I left it up to him. Logic was certainly on his side that cost containment was where this turnaround should begin.
For one thing, he was right to challenge the reports I’d heard that costs were contained. After all, they were coming from staffers in the division. What else would you expect them to say? No one likes to admit they’re wasting money. Everyone thinks they’re running fairly tight ship. But every budget has some body fat. Every budget can be trimmed and most budgets deserve to be ripped to shreds.
Of course, once your manager decides to focus on outgo rather than income, the critical questions are: Who does the cutting? Do you start chopping yourself or do you enlist your staff to wield the axe on the budgets they created? In my experience, it’s better to let the staff do it, but you have to give them clear incentive to do so.
A friend of mine was asked some years back to chair the finance committee of country club that was running $2 million annual deficit. His task was to erase the deficit.
The first thing he did was meet with the club’s general manager, the man who was largely responsible for running up the deficit over the years. Predictably, the general manager insisted that there was no fat in his budget, but he volunteered to trim the payroll by laying off few workers.
My friend declined the offer. Instead he audited the club’s books. This told him exactly how money was being spent in each part of the club. More importantly, it introduced him to the employees immediately below the general manager. These were people with heavy responsibilities — they ran the golf courses, the restaurant, the pool, the maintenance crews, etc — and they owed their jobs to the general manager.
Enlisting the troops below
My friend decided the club might benefit if these people felt allegiance to someone other than the general manager. So he did something unusual for cost cutting mode — he gave each of these managers raise.
In doing so he had cut the general manager out of the equation. The managers now felt they owed their jobs to the club. Since they knew the intimate details of their operations, they were more likely to know where cuts could be made. It didn’t hurt that my friend linked their increased compensation to productivity gains. It made them eager to cut more and make the cuts stick. I also suspect it was probably the first time anyone had ever asked them for their opinions.
In the end, the club erased its deficit within two years. Of course there were other factors. My friend raised membership fees too, which shrunk club membership and reduced costs even further. But the big achievement was focusing on costs and taking the general manager out of the equation.
The lesson here is this: Costs don’t spiral out of control by themselves. There’s always person or group of people pushing the envelope. Whether this happens because of laziness or irresponsibility or dishonesty is almost moot.
The key is to find the culprits and either take them out of the budget equation or motivate them to change their ways.
Mark McCormack is the founder of International Management Group. www.successsecrets.com
