The Mobile MBA: 112 Skills to Take You Further, Faster (Richard Stout's Library) (11 page)

Method changes are elegant, but business is not always elegant. Sometimes you have to act ugly to achieve your ends. Cutting costs is rarely nice, but is often necessary. There is a natural hierarchy of cost cutting which depends on the degree of pain and the urgency of the need within the organization. The normal goal is to reduce costs without having to move to formal redundancies. The problem with redundancies is that they are high cost, and you lose the best talent because only the people who can move are ready to leave.

sometimes you have to act ugly to achieve your ends

The hierarchy, from least painful to most painful, goes like this:

1. Eliminate discretionary spending.
Within this there is a mini-hierarchy: discretionary spend can include soft targets such as the coffee machine, flowers, and entertaining. Then cancel the year end conference and cut first or business class travel. These cuts cause grumbling, but nothing worse. Occasionally, items such as advertising and other marketing spend are seen as discretionary. They are good ways of cutting costs today and cutting revenues tomorrow, which makes things even worse in the long term.

2. Cut back on marginal labor:
reduce consulting budgets (pain free to the organization). Eliminate overtime and outside contractors.

3. Reduce total working hours:
ask for volunteers to move to flextime and part-time working.

4. Extend the scheduled factory shut down
over Christmas or summer: you may still pay the labor costs, but most of the other costs go and you can reduce inventory.

5. Ask for voluntary redundancies
, recognizing that often the wrong people volunteer. The best talent can go, the least talented are too fearful of finding new employment to move on.

6. Accept the inevitable
and make compulsory redundancies: by this stage it is best to cut hard and fast. Minimize the uncertainty. Think of it as surgery without anaesthetic: cutting slowly is not a good way to do it. Work like surgeons in the Royal Navy in the days before anaesthetics: the best surgeon was the one who cut fastest.

Parallel to these efforts, firms may also try to slash and burn the costs of making and selling their products and services, which may include any or all of the following:

• Reducing product size

• Reducing product quality (cheaper ingredients, etc.)

• Charging for ancillary services, which used to be included in the price before (for instance, airline booking charges, check-in charges, baggage charges, security charges, seat allocation charges)

• Cutting selling costs by reducing sales and marketing budgets

These market facing slash and burn tactics may work in the short term. In the long term, they simply make the problem worse if they cause loss of market share or revenues.

There are endless variations of this game. Even the finance director, who normally acts as the sheriff, becomes a cowboy when it comes to managing the apparent costs (and profits) of the firm. Underlying performance is not affected, but the presentation of the results can be manipulated to meet your required goal. A few of the finance director’s favorite tricks are:

• Make provision for “exceptional” items which happen to occur every year: this can appear after your headline profit figure, which is the one you hope investors will remember.

• Work the recognition of costs and revenues so that you can hit your targets as closely as possible.

• Take a pensions contribution holiday: bank the savings and leave the mess to the next person.

• Delay work on major expenditures, from advertising through to IT and beyond.

• Manage working capital tightly at year end to make your cash position look as flattering as possible.

• Improve the apparent cash position: leasing, sale, and lease back arrangements prevent you spending cash today.

• Move liabilities off balance sheet.

Within the firm, managers have to play this game to make their numbers.

Purists will point out that this exercise is pointless because it makes no difference to the underlying performance of the business. It may be pointless for the business, but it is 100% relevant to the career survival and prospects of individual managers from the CEO downward. So it pays to learn how much flexibility you have in your budget, and then use that flexibility to your advantage. If you are over-performing this year, then you normally have everything to gain from
avoiding too much over-performance. If you over-perform, your target for next year will be increased. Instead, bring forward recognition of costs and delay recognition of revenues: your target for next year will not be increased, and you will start next year with great revenues and low costs. Next year then becomes easy.

•
Introduction
66

•
Dealing with HR professionals
66

•
HR strategy and minimizing the cost of production
67

•
HR strategy and the quality of production
68

•
HR strategy: enabling growth (or decline)
73

•
HR strategy: compensation
74

•
Organization culture and what you can do about it
75

•
Organization culture and how to change it
76

•
When to fire someone
78

•
Ethics
79

Firms like to say, “people are our most important asset.” But in too many firms, loyalty is a one-way street: you have to be loyal to the firm which will be loyal to you for as long as it is convenient. And yet the underlying sentiment holds true: people make the business succeed or fail. As a manager, you will have responsibility for making sure that your own team stays in the performance zone: above the comfort zone but beneath the stress-out and burn-out zone.

Across the organization, there is a much greater challenge: how do you help everyone stay in the performance zone while maintaining the economics of the business and respecting the career ambitions and development needs of all your staff? Inevitably, you cannot achieve all of these objectives: if you have 5,000 people wanting to become CEO, you will end up with many disappointed people.

This is where the role of HR (Human Resources) becomes important. The HR function has endless different names, but a common purpose: make the most of our people. How this works varies by type of organization, but the principles remain the same. The purpose of this chapter is to explore the principles behind making the most of your people.

In the past, firms used to have a personnel department that looked after matters to do with personnel. Nowadays we have the strategic human capital division. So what do they do? Look after matters to do with personnel. Whatever they call themselves, treat them well. Managers do not need enemies, let alone ones in the HR department.

People matters fall into two categories: operational and strategic.

Operational matters include things like payroll, employment law and regulations, and are normally outsourced to payroll firms, accountants, and lawyers.

Strategic matters are the ones to which managers and HR have to pay attention. There are three strategic goals for any staff strategy:

• Minimize the cost of production

• Maximize the quality of production

• Enable growth (and occasionally enable downsizing)

Inevitably, these three goals are often in conflict, and different parts of the firm will be pulling in different directions, so HR has an important job to do.

You will find that every three years or so, all the HR strategies will change: you will find that there is a new way of recruiting, evaluating, and developing people which is much better than the old way. This three-year cycle is driven by the average length of service of the HR chief: every time they are replaced, then all the policies will change as well, so that the new chief can show that they are different and better than the past. This means you gain zero mileage by challenging the way HR do things: they will be highly protective of their territory and it will change anyway without your intervention. Work with their system, not against it. HR are useful allies and dangerous enemies.

HR are useful allies and dangerous enemies

In any firm, the cost of production naturally goes up. Staff want more pay. They want promotions which make them even more expensive. And to prove that they have big jobs to justify their titles, managers seek to employ more staff and increase their territory. This is as true of a consulting firm as it is of a manufacturing firm. If anything, it is worse in a consulting firm, because all the big egos think that they deserve immediate promotion, which would wreck the economic model of the firm if everyone’s wish was granted.

Managers need to measure the cost of production across the firm and in every department. Staff departments in particular hate this, because they say that you cannot measure the productivity of lawyers or people in HR. Oh yes you can: you can always find measures of productivity. If nothing else, you can measure each department’s costs as a share of revenues or overheads, and headcount as a share of total staff. They may be imperfect measures, but unless the department can find a better measure, use that one.

The obvious way to control the cost of production is to control headcount. Most firms do this reasonably well. The big strategic decisions here include outsourcing, offshoring, bestshoring, and all the other euphemisms for firing people in expensive countries where their jobs can be done for a fraction of the price elsewhere in the world. At the heart of this is a truly strategic debate: “What are we best at doing and what can other people do?” For instance, Apple employs over 30,000 people in Asia, of whom less than 100 are direct employees. Apple’s skill is not in making all its products, but in designing and marketing them. Everything else can be outsourced. Most firms are finding that there is less and less they need to do directly. This is a lesson first taught by Adam Smith observing the pin makers of Gloucester: specialization and the division of labor works.

The second method of control is wage inflation. Again, this is sufficiently obvious that it is fairly well controlled. The third way to control the cost of production is by controlling the staffing pyramid: this is usually done very poorly.

To be efficient, a firm needs a lean staffing pyramid. There are two ways to disaster. First, the top of the pyramid should be narrow, not wide: you do not want too many overpaid chiefs. Second, you want to avoid being bloated in the middle with too many staffers and middle managers. Both problems lead to excess cost and to politics, infighting, and indecision among all the managers and staffers. This happens because large organizations find it hard to fire senior people (think of the Civil Service): no one likes firing their friends and colleagues who they may have known for 20 years. And senior people, like consultants, are very good at showing that they are indispensable. So it is easier to fire one of the young and cheap receptionists, which does little to address the underlying problem.

To control the cost of production, you have to manage the staffing pyramid. In a healthy firm, that means shipping out expensive people at the top of the organization on a regular basis, and making room for less expensive junior people to take over. This has the virtue of opening the way for more promotions and leads to greater clarity and accountability at senior levels.

The irony of this is that HR are both the solution and the problem. HR are part of the solution because they can help you manage the staffing pyramid. They are also part of the problem because they are one of the many staff functions who are very good at justifying their existence and expanding their empire.

In staffing terms, quality of production refers only to the quality of the core input: people. You can do three things to manage this sort of quality:

•
Recruit the right people

•
Develop your people well

•
Put them in the right positions

It pays to hire the right people. In one 18-month period I managed to fill the financial controller’s role first with an idiot, then with someone who got caught trying to defraud us before I finally hired someone who turned out to be a drug dealer and armed robber on the side. It was expensive amusement. And the
cost of staff turnover is high: each time a post has to be filled, assume that it will cost you 50% to 100% of annual salary to fill that position once you have allowed for head hunters, advertising and interviewing expenses, costs of laying off the hiring error, and then the cost of finding a temporary replacement.

Every HR group has its own theory about the right recruitment methods. In France, the use of graphology is widespread. In Anglo-Saxon countries, aptitude tests and psychographic profiling are common.