Nellaiappan's Column-9: "Cost Reduction"

The most commonly misunderstood concept, in my opinion, but widely used in corporate circles, is “cost reduction”. Other euphemisms/ synonyms for cost reduction are austerity measures, retrenchment, golden handshake, trimming and ETOC (every thing on contract).

I have found all these things extremely counter-productive. Cost reduction is definitely not stopping some expenses, curtailing few facilities extended, rationing some entertainment and disowning some responsibilities. It cannot be at the cost of values and ethics.

In one company I know, at the pretext of austerity measures they stopped the daily morning and evening tea to all contract employees. The explanation given was that it was the duty of the contractor and not the company’s. The saving arithmetic was 70 people x 2 times x 365 days x 3 rupees. But the feelings of the 70 people with flesh and blood were completely ignored. There were visible repercussions and the damage caused was heavy, but it was not tangible for the costing department.

The admin people to their credit, allowed all Air Conditioners in the company only two hour operation per day to save money on electricity. The problem was not more of physical but the very idea irritated most of the employees and that became a hot topic for quite some time.

People were making fun out of these austerity measures and have even gone to the extent of recommending half-pant and shirt uniforms for employees, instead of full shirt and pant. One accountant seriously asked why Rs.500 per month was given to a priest for performing weekly 'puja' in company premises and suggested to perform the same by one of the company employees.

One important inference from all the above is an amenity once given if stopped suddenly will have adverse effects and more often that not will be counter-productive. For saving hundreds, you may be losing thousands. Further, it affects the morale of the employees, disturbs their sense of belonging and the grudge they carry in their minds is bound to affect productivity and performance.

One of the unit heads declared in the company’s group meeting that he was ready to retrench 15 employees with immediate effect and with a nod from the top and it was implemented at once. Selected 15 People with 15 to 20 years of experience in the company were asked to leave with short notice. The after-effects of the above incident were a great blow to the management. 50 % of the employees - all good people left the organization without or with short notice. Only employees who had no option remained.

It is proof that such measures could send wrong signals to the other employees like the company is in trouble or the same thing could happen to them in future. So they conclude it is better to leave the sinking ship.

The employee turnover was very high and as a measure to retain the employees the management increased the remuneration package to all its employees. But it was too late and most of the good people had already left the organization. Many people realized their own potential only then, and got good placements. The inferior lot who remained in the organization was rewarded with revision for their inability to move out of the organization.

To fill up the gap created by the resignation of good employees, the company recruited many new ones with high starting pay.

Many public limited companies announced golden handshake to get rid of inefficient employees. Contrary to the expectations, all good employees availed the opportunity and thus weakened further the system in existence.

The feeling of oneness and the family concept is lost in letting work on contract basis. Contract workers always carry a grudge against the company and its employees and at the very first opportunity they ditch both.

There is no compromise in the cost of safety and environment. Any compromise in these two will be detrimental in the long run.

The real cost reduction comes from increased productivity and innovative process changes and modifications. Savings by all other methods are very marginal and if overdone will become counter productive. Here one should remember Parato’s 80-20 principle.

No doubt a saving is a saving however small it may be. But one act of improved productivity will excel hundred such trivial savings all put together. Leaders always look for big leap. Being a leader I hope you will also vouch my statement.