Managing in Economic Uncertainty: Cost Reductions
Managing in times of economic uncertainty means facing difficult choices. Reducing costs is a choice that leaders often face but mostly dread. Many of us on the Enterprise Strategy team have faced multiple macroeconomic headwinds or other industry- and company-specific challenges in our previous roles as CXOs. In this post, I outline some of the lessons we learned as senior leaders navigating in an environment where we were managing cost reductions.
Communicate Directly, Widely, and Clearly
Conversations about cost reduction are never easy. It is tempting for leaders to avoid having them directly, and rather to use the finance department or the program management office (PMO) as intermediaries. These are times when your teams must hear directly from you. While you may not have all the answers to questions that will invariably come up, being transparent and clear about what you know and what you don’t will go a long way in earning trust. It is also important to go wider than you otherwise would by reaching out beyond your senior leaders to the broader team. While you cannot pass your stress and pressure on to your team, it is critical to be authentic and not sugar-coat the message. High-performing teams with a high degree of trust expect their leaders to be direct and to accept and support them when they are vulnerable.
Go Deeper Than You Initially Think
Your teams need stability and the time to revise and execute their plans in a rapidly changing environment. It creates more frustration when the goalposts frequently shift than the reduction itself. In an uncertain environment, unless you have a very clear short-term issue that you are solving with a clear end in sight, always go deeper than you initially think you need to go. If things improve faster than your estimates, you can reverse the cuts, but a monthly call to find 5 percent more will drain your team.
Watch Out for Shapeshifters and Teleporters
Tough decisions will have to be made during a cost-reduction exercise, and that means stopping funding for specific initiatives or programs. When you decide to stop funding something, make sure it actually gets eliminated—sometimes, it is hard for managers and teams to let go of pet projects even when the decision has been made to deprioritize and stop investing in them. The same projects and programs can reappear under different names or get added as “additional scope” or “extra features” into other funded initiatives. I call them “shapeshifters”—they don’t actually go away but simply change in name, shape, and form to reappear. Pay attention to phrases like, “but what if we can find the budget for it?” The key is to decide based on the business value and priority, not on who the most creative budget manager is.
Similarly, when you decide to reduce the funding for a function or an activity, make sure that it is not just the reduction of that function or the activity for a particular team or department but rather for the entire organization. For example, say you decide to reduce your spending on advertising. That shouldn’t mean reducing the advertising budget of the marketing department but then letting individual brands, products, or Line of Businesses (LOBs) keep spending on advertising. It is far too common when funding is cut for a specific activity within the primary function for other groups within the company to allocate their own budgets to simply continue that on their own. I call these “teleporters”—they disappear from one place only to reappear somewhere else. Look out for phrases like, “but we are funding it from our budget.” Teleporters are often an indicator of going too far with your reductions: your organization is telling you that you are now removing the essentials.
Push back on the Sacrificial Lambs and the Fake-outs
In a sufficiently large enterprise, savvy budget owners have a way to pad initiatives (e.g., the famous 20 percent “contingency buffer”) or to include asks that shouldn’t even be funded in the first place, regardless of the economic situation. These “easy” dollars are offered out first when the reductions come. I call them “sacrificial lambs.” Take them but then push for more to truly force prioritization and optimization.
On the other end of the spectrum, you may get offered critical items as reductions that you simply cannot cut. I call these “fake outs”—like IT saying we can reduce the budget by eliminating emails. Maybe there isn’t anything that can be cut without impacting business-critical functions, especially in smaller departments or teams, but fake-outs typically indicate a need to inspect and probe deeper.
“Non-” Discretionary, but Is It?
It is a common practice to first target items deemed as discretionary spending in your budget. However, I have often found—especially in the case of IT—that using an opportunity like this to inspect non-discretionary items provides a much better long-term advantage. Discretionary items, like cutting back on some projects or slowing down new product development, may help you meet your short-term reduction goals. Building a more resilient business will come by questioning your assumptions about non-discretionary spending that you otherwise take for granted. Is that monthly lease for the data center really non-discretionary? How about your outsourcing provider with a multi-year contract structure that is based on a fixed maintenance cost per server and size of your storage? Instead of just trying to find some short-term reduction, this should be turned into an opportunity to build a more resilient business using the cloud. We saw this during the pandemic as some businesses had to rapidly scale up while others had to scale down.
While it is important as leaders to do what it takes to weather the storm in the short run, companies that use this opportunity to lean into transforming their businesses for the long run typically emerge stronger from these cycles. That involves an even more important aspect of managing in economic uncertainty—people. I plan to address that next in a future post. Ishit