2. Unwise Approach One: Cut Cost Factors

By far the most common approach to cost-cutting is to reduce everybody's budget by constraining their expense codes, e.g., training, travel, or consulting budgets. Edicts demand reductions in specific types of expenses; or in some cases, all spending on certain expense codes is frozen.

A related variant is declaring reductions in headcount (another factor of production). In some cases, all open (unfilled) positions are put on hold or eliminated, cutting organizational capacity in random locations. In more extreme cases, headcount is reduced below current levels and layoffs are required.

Another variant is a simple cut in total budgets. Across-the-board budget cuts leave it to individual managers to decide how to trim spending.

The impacts of this kind of budget cutting are insidious.

Impact: Widespread Ineffectiveness

Ultimately, cutting expense codes reduces productive capacity, which translates into reduced quality and/or things not getting done. The critical issue is: Exactly what is sacrificed?

Cutting expense codes leaves it to individual managers to figure out how to cope with demands that far exceed their groups' constrained capabilities.

When each manager independently tries to make ends meet, the selection of work products which suffer are virtually random.

When one manager cuts back on results in one area, others who need that group's help find themselves crippled. Those who aren't impacted by that manager's cuts are likely to be affected by cuts in some other support function.

With the impact on results resembling a mosaic, a bit here and a bit there, virtually everything the company does is crippled in some way. The entire company becomes less capable of doing anything.

Impact: Stovepipes

As people are disappointed with the support they (fail to) get from peers, staff gain a reputation for unreliability.

Managers become reluctant to rely on peers. Teamwork is replaced with self-sufficient "stovepipe" organizations -- de facto decentralization.

As staff dabble in specialties outside their area of expertise, productivity falls, quality suffers, and costs rise. Furthermore, synergies are lost as functions occur in multiple places without shared methods, frameworks, data, and infrastructure. And costs rise as redundant infrastructures (such as tool sets) are built.

Impact: Local Ineffectiveness

In the futile attempt to satisfy overwhelming demands with inadequate resources, managers typically forgo important investments in themselves their own groups. They cut their own training, process improvements, and research. And they often burn out their staff with excessive workloads.

This leads to short-term problems such as reduced productivity and turnover.

It also leads to long-term problems such as a lack of planning and innovation, obsolete skills, and inadequate infrastructure.

In both the short term and the long term, entire organizations become less effective at doing anything, even those things that are worth doing.

Impact: Lost Opportunities

Another unfortunate effect is that organizations miss great investments, ones that might even help solve the cash-flow problem.

For example, what if sending staff away to audit a vendor or renegotiate a contract could save many times the cost of the trip? A travel ban would postpone these savings.

General cuts in expenses preclude good investments along with marginal activities.