This document discusses the risks of unsustainable cost reduction strategies, particularly those taken as a knee-jerk reaction during economic downturns. It notes that while organizations may need to cut costs in the short term, extreme measures can damage company culture and human capital over the long run. The document advocates assessing human capital investments and avoiding slash-and-burn approaches. It also stresses the importance of communication with employees and continuing professional development programs despite budget cuts.

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Economic Navigation and Leveraging Your Human Capital
Unsustainable Cost Reduction Strategies … A Risky Organizational Diet?
EXECUTIVE SUMMARY // JANUARY 2009 // 6 PAGES
Certainly many of the readers have either followed a diet of some sort or have heard from their family and
friends about the diets they have followed. In many cases, individuals have experienced the extreme side of
their dieting practices. One theme, in particular, continuously rears its ugly head and that would be the
damage that results in attempting to satisfy their dietary requirements and short-term goals. In many, if not
all cases, dam age is done on the onset and, most unfortunately, damage can last for an extended if not
permanent period of time.
Similarly, organizations, during severe economic downturns may also find themselves needing to go on a diet
to weather the storm over the next several quarters. The similar theme again tends to rear its ugly head …
the need to take extreme measures in order to suffice short-term operational needs and the consequent
medium- to long-term damage that is caused as a result.
During favourable economic times, top-notch companies tend to lose their disciplined cost- reduction
practices. As a result, during unfavourable economic downturns, the same companies reactively cut costs to
ensure that their margin remains at suitable levels so as to sustain acceptable operational levels. Whatever
the costs may be, prudence must be paid to effective cost-reduction management throughout the organization
on a regular and consistent basis in order to reduce dependency on reactive and “knee-jerk” decision-making
practices.
In this article, specific mention will be made of –
i. Assessing your “Hum an capital infrastructural costs” and ensuring that “knee-jerk” reactions
are not part of your strategic formula
ii. Two critical points to focus on after making capital strategic decisions during an economic
downturn

2. i. Assessing your “Human capital infrastructural costs” and ensuring that “knee-jerk”
reactions are not part of your strategic formula
In many respects, through a severe economic downturn, the organizational instinct is to react by utilizing a
“slash-and-burn” methodology. The mind-set is to take from long-term strategic SG&A investments (i.e. Sales,
General and Administrative e.g. training and development programs, recognition programs, etc.) and divert
the capital into short-term company core operational programs that have a very temporary resolution, both
operationally and culturally, within the organization. Unfortunately, these strategies lack the integrity to ensure
the overall fabric of the organization stays intact over the long-term.
This is not to say an organization must not ponder or rethink their current capital investment strategies during
soft economic times, but it is important to emphasize the need to step back before employing the “crisis”
decision strategy vs. sound decision-making strategies that will allow the organization to leverage what has
already been successfully developed in order to survive, and continue to survive, moving forward.
Focusing on the traditional “knee-jerk” reactions … one example is consumer spending during tough economic
times. We all hear about our current “economic crisis” and a typical response is to save our money which,
consequently, leads to reduced consumer spending. Once consumers go into “panic mode” they reduce their
spending activity and we then see a vicious case of negative economic inertia. When we turn our attention
to our organizational environments we tend to observe similar behaviours where the top decision-makers enter
into “panic mode” and employ a “knee-jerk” reactive decision-making strategy. In many cases this may suffice
the organization’s im m ediate operational needs just to “get through the next couple of quarters” but, more
significantly, creates long-lasting damage throughout the organization if not considered in more depth.
The following are typical “knee-jerk” reactions and the subsequent negative results they have on the fabric
of an organization.
“Knee-Jerk” Reaction Result
Excessive labour force reduction Excessive employee stress
Reduced or cut training and development budgets Stagnant skill development
Reduced employee communication programs Low transparency and employee loyalty
Reduced acknowledgement and recognition programs Resentment and burnout
Although the above is not an exhaustive list, the reactive decision-making that ensues with economic
downturns can be damaging to the organization in the immediate-term and, more importantly, have severe
negative effects on the organizational fabric over the long-term.
As the subtitle suggests, one of the best strategies in a severe economic downturn would be to take a step
back and assess the current SG&A expenditure and investments (in this case human capital expenditure and
current infrastructure) and really consider the implications, both overtly and covertly, that will inevitably affect
the organization and the individual employees that form the core of the organization’s existence.
The following research (Corporate Executive Board: 1998) highlights the less-than-expected return on
investment derived from extreme short-term cost-cutting ventures.

3. In summary –
· 90% of companies fail to sustain cost reduction/efficiency for more than 3 years.
· W hile most CEOs enact quick cost-cutting measures with their SG&A’s (human capital investments
included) companies that maintain cost-reduction over the long-term tend to spend more on their
SG&A’s to drive operational efficiency, reduce operational costs and leverage their margin.
· Elite cost-cutting companies sustain gross margin expansion by 2.5% annually across 5 years, generating more
than 50 million dollars in savings.
As it has been alluded to in this article thus far, short-term, if not “knee-jerk”, reactive solutions in many cases
tend to be temporary in nature and the ability to sustain steady cost-reduction practices in organizations over
the long-term is limited in many respects.
You might ask yourself: “now, what has this got to do with my human capital infrastructural decision-making
and how would I factor the above notion into my overall strategic thinking”. If we know that the current theme
of short-term and “knee-jerk” reactions can be very harmful without considering medium- and long-term
effects, then logic would dictate the need to sustain cost- reduction strategies over the long-term in order to
avoid the extreme short-term “knee-jerk” reaction that many companies take in order to respond to external
pressures like our current economic picture. When attempting to employ a balanced decision-m aking strategy
that not only “stops the bleeding” for now, but one that is sustainable m oving forward, equal emphasis must
be placed on how to leverage off of long-term decision-making and not necessarily destroying what has been
built in the nam e of the “knee-jerk reaction”.
The last section of this article will focus on employee practices that are designed to offer alternative
approaches to people management in tough economic times. As a result these practices aim to leverage
current human capital investments vs. breaking down those key investments.
ii. Two critical points to focus on after making human capital strategic decisions during
an economic downturn
a) Employee communication –
During tough economic times like we are seeing today, the inevitable result of cost-reduction and
subsequent down-sizing will come to fruition. The critical piece to keep in mind is the focus of leadership
energies and their subsequent leadership strategies when it comes to lowering stress levels and
improving productivity levels within the employee population.
Just as consistent and transparent communication strategies are considered during an organizational
change initiative, so should they be considered during a down-sizing event due to external economic
pressure.
A natural consequence of an economic downturn is “do a lot more with a lot less”. W hen it comes to
translating this notion into our employee strategies, the tendency is to expect Johnny or Jill to work a lot
harder with a lot less. This most certainly will always be the case, and an inevitable consequence, of cost
reduction practices. The key in this respect is to pay extra attention to the design and execution of
leadership strategies and, more specifically, communication strategies. These strategies should be
designed both for groups as well as individual employees.

4. The following example illustrates three approaches a manager might take with a solid individual performer
when times are tough economically (Sited: 2008 Harvard Business School Publishing Corporation -
Robert S. Kaplan and David P. Norton)
! “Hey, Sarah, we’re having a bad year, so if you want any kind of bonus at all, you’re going to have to
suck it up and work harder than ever before. Sorry, I know it’s tough, but that’s just the reality.”
! “Hey, Sarah, I know that there’s a lot of pressure on you now, on all of us, really, and I want to make
sure you’re getting it all done. Let me know how I can help.”
! “Hey, Sarah, I know that there’s a lot of pressure on you now, on all of us, really, and I want to make
sure you’re taking care of all the things that are important to you — not only at work but in other areas of
your life, too — so that you don’t burnout. W hat small changes could you try here that would make things
easier, so you’d have more energy to focus on performing well for our business? W e desperately need
your best efforts!”
The first scenario reflects a one-dimensional approach that demonstrates an immediate reaction from the
manager not considering various other factors that may be influencing Sarah, to a large degree leading to
further pressure and eventual disengagement. The second scenario reflects an approach that shows support
in one way, but is vague in many other respects and will not convince Sarah that “things are OK”, which again
presents the threat of burnout and disengagement. The last scenario is the preferred strategy for reasons
not highlighted in the above two scenarios. This approach will most definitely provide an effective foundation
to ensure ongoing productivity from Sarah as well as her ongoing discretionary effort.
b) Professional developm ent –
In many cases, the immediate reaction from organizations is to slash professional development/training and
development programs. In addition, the common theme amongst front-line managers is to naturally express
the fact that, due to limited resources, they “don’t have the tim e” to invest in their individual em ployees’
development. This may include sending their employees to training program s (externally and internally),
carving time out during the work day to pay attention to their employees’ individual development plans, etc.
This unfortunate behavioural byproduct of cost-reduction in tough economic times does, and will, come at a
hefty price when attempting to engage current employee groups and subsequently attempting to increase
productivity to compensate for reduced revenues and smaller margins. Having a broad enough view to fine-
tune skills during tough times will most definitely allow the organization to sustain productivity during this time
and rebound, if applicable, when it’s tim e to re-establish a retention strategy.
In summary, sustaining cost-efficiency with specific reference to human capital related decisions will require
an ongoing balance. Not creating a sustained balanced approach to these decisions will most certainly lead
to harmful “knee-jerk” reactions especially during tough times. These reactions will most certainly allow the
organization to take one step forward in the short-tem , but will consequently make the organization take
several steps back over the long-term.