Survival Guide: Driving a Sustainable Restructuring Program
My article, Business Survival Guide – Creating “Survival Time”, addresses issues business are facing during the COVID-19 crisis. It speaks to the need to assess and extend your "Survival Time" - the amount of time that you have until you run out of money. Among other actions, I posit that you need to create 3-4 months of survival time by attacking the amount of money that you are spending on your “extended workforce”. In this article, I will explore this idea more deeply.
As you take stock of your survival resources, you probably have a few snacks which you might be able to ration for a day or so. However, your survival kit probably contains a fishing hook, some fishing line, and a survival knife. You could eat the snacks and survive for a few days. However, a more sustainable strategy would be to utilize some of the snacks as bait and catch some fish. Eat some of the fish but utilize parts as bait to catch more fish. By doing this, you could substantially increase your survival time.
Approaching how you restructure your workforce during this crisis is similar. You probably already made immediate and deep cuts to your direct labor base. This was relatively “easy” to do because you could take the actions unilaterally and quickly. While this extended your Survival Time, it was probably not by enough. If you over-focus on direct labor actions going forward, you might lose the very resources that you need to rebuild your business and begin thriving again. Now is a good time to step back and:
Focus on Sustainability - Make shallower cuts but spread them over your entire extended workforce – direct and indirect labor, employees, work-for-hires, freelancers, consultants – everyone that supports you.
Rethink Spending - Re-examine, re-think, and re-engineer everything that you are spending money on. Kickoff a "Rethink Spending" initiative and change the narrative completely. Create an environment that encourages everyone to be a spend manager and drive efficiency.
Focus on Sustainability
It is very easy to become overly focused on your direct labor base when looking at spending cuts. You control the actions that you take (pay cuts, reductions in force, part-time working programs). You can take these actions quickly and unilaterally, at least in the United States. However, you run a danger of following a process which looks something like the following:
Determine how much money you need to cut.
Allocate that cut across your direct labor base because it is obvious and easy.
Deal with the “Uh Oh” realization - the cut is too big and the actions too draconian.
Re-think the type of actions you are taking.
Take the actions anyway and figure the rest out later
I am not at all suggesting that company leaders trivialize restructuring actions. Having participated in many such efforts, I find that most mangers grudgingly support restructuring actions because of the business need. However, they also lose sleep because they know they will be hurting the very people they work with every day. Frequently these initiatives are done in a rush with cursory “paper” plans for post-restructuring sustainability. Rarely do restructuring programs yield the “productivity” that companies ascribe to them. Frequently they simply result in “More Work / Less People” and have negative consequences to the business.
What I am trying to do is offer a perspective on why labor restructuring actions so often fail and introduce a different approach for the COVID-19 survival situation. It is easy to focus on the direct labor base because the cost is well understood, it is relatively easy to analyze, and actions can be taken relatively quickly. Extended workforce costs are less well understood, they are harder to analyze, and the actions harder to develop. That said, the results of over-focusing on the direct labor force are often poor. As a CFO and transformation leader in a Fortune 100 company, I have led many restructuring programs. I have also studied the restructuring programs of other companies. I have observed an interesting oscillating pattern that emerges over time:
Restructuring actions are taken.
The actions do not achieve the desired result and the business begins to experience side effects.
Costs creep back in.
More restructuring actions are taken.
Rinse and repeat. It is interesting that many companies now report “Restructuring Costs” as normal operating expenses which means to me that they really don’t work as intended.
Making cuts sustainable does not mean taking a smaller cut. In fact, the first step that I mention above is still critical – “determine how much money you need to cut”. You still need to extend your Survival Time. However, the second step needs to change. Rather than focusing cuts solely on the direct workforce because it is easy, spread the cuts across the entire extended workforce. If you need to cut 20% of your direct labor costs, you may only need to cut 5-10% across the extended workforce. The advantage – a much more sustainable situation for the business. The disadvantage – a need for deeper analysis, and much more sophisticated communication and negotiation. Even defining who the extended workforce is and measuring its true cost can be tricky.
Successfully executing a more sophisticated restructuring program may require skills, experience and capacity that may not be available from within the company. Consider bringing on outside talent to not only fill the gaps, but also help with the “dirty work”. Outside talent can be particularly helpful in areas like planning, analysis and leading the difficult task of communicating and negotiating with third parties.
Every person that supports your business, whether they are your direct labor force, or your extended workforce, adds an incremental amount of “overhead” spend. Another word for this is “burden”. People travel, they eat, they need technology to work, they need tools to communicate and collaborate, they need office supplies and tools to get their jobs done. Over time, the “burden” takes on a life of its own. It is infrequently analyzed or optimized as the business develops and grows. The individuals that spend money do not always have a motivation to change the way that they are spending money. Many budgeting processes start with the "run rate” and increase spending from there based on growth projections. Rarely are budgets scrutinized. Rarely are budgets developed from the bottom up to eliminate waste.
At this point, you may be worried that I am suggesting “Zero Based Budgeting” as the answer. No - not exactly. Zero based budgeting is not a bad approach. However, it takes a long time to do, requires a heavy investment in management and consulting time, and has extensive change management needs. The data cleaning, enrichment and analysis alone is a massive activity. The conditions for many companies during COVID-19 will not support this kind of effort. What is needed is an approach that can be executed much more quickly, and that recognizes the constraint on resources.
Shift the focus away from the budget, at least initially. Companies simply may not have time to “re-budget” and “re-plan” every line item. Rather, take actions that rapidly change the “spend culture”. Rally the troops. The one positive thing that COVID-19 has done is change everyone’s mindset about the need for change. People are at a point where they desperately want to resume some sort of normalcy. If you have a plan that can help restore some of that normalcy, they will support it. Moving the focus from salary cuts and reductions in force to other kinds of spend actions should be welcome.
The “Rethink Spending” initiative should be a “tops down / bottoms up” initiative. What I mean is that the direction, communication, and incentives need to come from the top.
There needs to be a facilitator or controller that keeps things “loosely organized”, to maintain momentum, and to ensure actions are being taken.
There also needs to be a manageable level of reporting and analysis. The full level of detail required for zero based budgeting is not needed. However, it is critical to understand the impacts and outcomes of the actions that are being taken.
That said, the ideas and actions need to come from everywhere – not just the top. While brainstorming ideas is a good way to start, it is even more important to create mini missions to probe questions like the following:
Given that remote working has become part of our lives, can we reduce the number of facilities that we have?
What areas of our IT infrastructure can we change to be both more effective and lower cost? Because IT and company growth “morph” at different rates over time, IT often provides a warren of opportunity. Addressing issues like outdated email addresses, un-needed software licenses, sub-optimal internet services, and IT services that no longer make sense can lead to significant savings.
Do we really need these recurring credit card and direct debit charges, or can we eliminate or reduce many of them?
The “Rethink Spending” initiative should be manageable to implement. It can also be a morale booster if done right.
Many companies have needed to take tough actions due to the economic disruption caused by COVID-19. More tough actions are likely being considered. However, it is important not to solely focus on salary cuts and reductions in force. The entire extended workforce, and the “burden” that supports the workforce are significant areas of spend. These are less well understood, and less unilaterally actionable, so there may be less focus on them. However, while it was necessary to take tough employee actions during the onset of COVID-19, an over focus on employee labor can lead to serious side effects in the long-term. We now understand that the impacts of COIVD-19 are far reaching and enduring. We need to shift gears and begin the journey of transforming our businesses to restore balance and make the changes enduring and sustainable.
"Everything that can be counted does not necessarily count; everything that counts cannot necessarily be counted."
- Albert Einstein