Why Cut Wasteful Spending Only in a Downturn?

Downturn Forces Cutbacks Big and Small - WSJ.com

There’s a lot of town during any downturn about cutting costs in
businesses or organizations. Often, the talk is about “cutting
heads” — a cruel way of talking about firing people. Or,
organizations clamp down on “non-essential” spending, such as
travel (a favorite category and one whose “non-essential” status is
dubious, especially when focused on travel for training that’s
already been paid for).

Lean, to me and many others, isn’t primarily a “cost-cutting”
strategy. It certainly isn’t a layoff strategy — Lean requires
employee involvement and using Lean to drive layoffs will kill that
employee participation. Ergo, you shouldn’t use Lean to drive
direct firings. Lean can be used as a growth strategy, through
improving products, service, or quality. But I digress.

Back to cost cutting. I’m not saying cost cutting is bad. Not at
all. We shouldn’t spend money unnecessarily when it’s company
money, regardless of whether we are in a downturn or not. The WSJ
had an article last week (linked at the top of this post
and here) about companies that are tightening their belts in
tough times.

Some examples of cost cutting:

• Asking employees to mow the lawn to avoid using a service
• Switching to black ink instead of color on the company
  letterhead
• Insisting on double-sided printing and copies
• Clamping down on unnecessary color printing/copies 
• Cutting back on food or snacks for office staff
• Sending fewer products and salespeople to large industry
  conventions
• Reading online news instead of paying for print magazine
  subscriptions
• Cutting incentive gifts ($10 gift cards) for staff

Some of these cost cutting moves could be debated — what if saving
a few bucks on snacks destroys staff morale? Maybe it shouldn’t,
but it could. The one company profiled in the article actually
backed off on the snack-killing plan after employees complained.
Asking employees to mow the lawn might constitute a “waste of
talent.” What if staff could generate more sales or cost savings in
the real business, given that time? Maybe it’s actually “cheaper”
to hire a lawn service?

Some of the cost cutting moves might hurt sales — such as
scrimping on sales travel. But maybe there are methods like online
meetings that could be used instead and might actually be effective
when companies are flush with cash.

Cutting incentives… now that’s a pet issue for me. As a Deming
disciple, I question the impact of individual incentives and
“employee of the month” competition prizes. Maybe the company
should kill those incentives (which often cause dysfunctions)
regardless of economic conditions.

Whatever the verdict on any of these costs, the question I’d ask is
this:

If it’s “waste” and “unnecessary” now, why not
always??

I think some of the answer to that question is how companies
“manage” earnings. Wall Street and investors often want consistent
profits or consistent growth in earnings. If a business normally
has some cycles and “common cause” variation in its sales or
profits, profits might naturally fluctuate around some mean (or
growth rate). In periods when profits might be “too high” there
might be an incentive to actually waste money. This prevents
profits from being too high, this preventing disappointment when
profits aren’t as high in the next time period.

There’s a lot of “tampering” with costs in the name of keeping
profits stable. Deming taught us that tampering with a stable
system actually INCREASES variation. I wonder if the same is true
with profits?

Companies like Toyota seem to have a pretty consistent aversion to
waste. Toyota is often described as a very “frugal” company. Even
with HUGE profits, they’re a “cheap” culture, people say. This is
often attributed to the rural roots of the Toyoda family (and the
company) and the severe lack of resources after World War II.
Toyota couldn’t afford to waste money, so it’s embedded in the
culture, right?

The WSJ also
had an article asking, about individuals, if frugality or
miserly behavior is innate or learned — “nature” or “nurture”?

Are we born cheap or made that way? It’s a tough
call.

The researchers are mixed:

Scott Rick, a postdoctoral student at the University of
Pennsylvania’s Wharton School who has done research on what makes
people cheap, says that childhood plays a big role. If you have two
thrifty parents, you’re likely to be thrifty as well.

Likewise, people who lived through the Great Depression were
often thrifty their entire lives. Since the 1930s, each successive
generation has gotten to be more free-spending.

The current financial crisis could change that. “Right now,
there are probably a lot of children who are going to be
tightwads,” says Mr. Rick.

But our childhood isn’t the only factor. George Loewenstein, a
professor of economics and psychology at Carnegie Mellon
University, says people have innate tendencies. “It’s almost like
people are born tightwads or cheapskates,” says Dr. Loewenstein,
who published a paper on the subject with Mr. Rick and another
author.

What do you think? Are some companies innately frugal? If so,
why? The founders? The current CEO?

Is your company “cutting costs” in ways that are really hurting
your business? Are they “saving money, no matter what it costs us?”
Does Lean enter into any of that discussion in your
organization?