When Does Cutting Costs Create More Waste and Lower Profit Margins?
Reducing budgets and expenses, cutting costs, and cutting corners; these are all things that companies are constantly reviewing with the purpose of increasing their profit margin. But when do these practices start to backfire?
Companies create more expenses, more waste, and more work when they get carried away with reducing costs, budget, and expenses. When you continue to reduce at some point you end up with very little, or not enough to be successful, creating a bigger problem than the initial "problem" of having "too much" (or in other words the problem of greed; more profit).
As an example, when a Fortune 500 bank took over Countrywide around 2008 after the mortgage market crashed (due in part to Countrywide's deceptive mortgage practices), it was presented to the associates that many of the executives were let go with severance in order to usher in the new Countrywide executives. Budget cuts were immediate.
It started with removing simple things like lunchroom items such as utensils, napkins, coffee. It then spread to eliminating any team building or associate appreciation events. All the little (but incredibly important) things that bring unexpected joy and the feeling of appreciation from associates.
When people and processes began being eliminated the chaos really began and eventually morphed into an almost un-fixable dilemma (I believe that most everything can be "fixed" and even improved exponentially when you use your people instead of profit as a center point for decisions).
The greatest expense a company has is their people. And for good reason. People are the connectors between the company and the client, between the company’s products and offerings and the consumers. While many things have been automated over time with Artificial Intelligence and automated processes, human beings are still the greatest tool and asset a company has. When a company starts eliminating positions (people), some of that work may be passed off to an automated process, but much of it is passed on to another human being. We see this ALL the time in companies of all sizes.
In the last 15 years of year at the Fortune 500 Bank I worked for, I not only saw the negative outcome of eliminating people to the degree at which they are. I also held many positions that were responsible for creating the processes that were replacing people to “reduce costs”. There were some processes that made sense from both a company standpoint as well as financial and productive standpoint including eliminating pointless processes that create space for associates to focus on the important revenue drivers. I also witnessed many of these newly designed processes create even more waste as well as detrimental impact to the people and the company. *This concept is not unique to this company, as I have seen this occur within companies across the country.
One of the biggest blind spots I see over and over within large corporations and companies is that cost reduction decisions are made at high levels without the proper due diligence and testing at the levels at which they are making reductions. I see companies making these decisions simply from looking at reports or job descriptions which can be incredibly deceiving and misleading. Reports can be manipulated, pivoted, and pulled in countless ways; creating the desired “outcome” based on the goal of the reduction plan. Job descriptions many times do NOT accurately depict the actual role and responsibilities of that job, or in other words they do not reflect the incredible value that role brings to the company. So when the role/job reduction is made it creates such a hardship within that department that it almost always guarantees other roles dropping important tasks in desperate attempts to stay on top of all the new responsibilities added to their plate from the reduction. That in turn spills over into partnering departments, and ultimately reflects in lower associate satisfaction, increased turnover, lower client satisfaction, and more. This in turn costs the company money and resources which many times is not identified meaning the company does not see the direct correlation between the role/job reduction and the increase in chaos as the decisions are made at a level so high they may never see the negative outcome or identify where it came from.
It is standard practice for a company to make role reductions without ever walking in the shoes of the person in that role, and without ever experiencing or witnessing firsthand how potentially critical that role actually is (off of paper). The reduction decisions are made from an office with little actual front-line insight or feedback. This is a huge mistake that costs companies millions of dollars.
I will use an example from a Fortune 500 Bank' “Single Leader Model” for context. I also recorded a short video about this which you can watch HERE.
Within the last 5-8 years banks have created the Single Leader Model with the purpose of reducing costs and increasing profit margins to their CEOs and stockholders. High level executives used reports to identify the Financial Centers (or banking centers; the brick and mortar banks where customers make deposits, withdrawals, etc.) that had lower traffic than their most prominent and profitable branches in California, Florida, and other high traffic areas. Based on how they chose to view the reports, they determined that these lower traffic Financial Centers could operate on reduced staff with the same goal algorithms as the higher traffic centers.
I’ll demonstrate with a simple example. The Single Leader Model was created from the idea that lower traffic areas need less associates (highest cost of running a Financial Center, or any business) since they will not see the same amount of client traffic as a higher traffic area. It was then determined that with less associates, you don’t need an Assistant Manager to assist with management duties, leaving all management duties (auditing documents, meeting clients at the end of a transaction, training new associates, addressing behavioral issues, etc.) to one person.
Let us say that a high traffic Financial Center in California has 15 associates working in that Financial Center including a Financial Center Manager and Assistant Manager vs. a lower traffic area like Oregon with an average of 6 associates and a single Financial Center Manager. Goals are then allocated based on geographic area (poor areas are targeted for more checking or savings account sales goals, while affluent areas are targeted for investments, credit cards, and loan sales goals).
I will use units for simplicity. Both the15 associate Financial Center and the 6 associate Financial Center has a goal of 10 units per person per day. Seems to make sense so far, right? This is actually where the simplicity ends and reports are no longer able to provide the insight needed to make people-based, or role reduction, decisions.
Both of these Financial Centers have the same number of tasks that need to be completed (300+ monthly audit and process tasks, opening and closing the Financial Center which requires 2 people, training new associates, dealing with Human Resources for behavioral concerns, etc.) but the Single Leader Model Financial Center, with their single Financial Center Manager, has to try and balance and complete all of these tasks on their own. They have the *same number of tasks to complete as the high traffic Financial Center Manger*, with a fraction of the staff.
Now we layer on things like vacations, sick time, and leave of absences (many banks and corporations have an astronomical number of people on leaves of absence at any given time, an incredibly concerning fact directly corelated with the treatment of their associates who many times have no choice but to go on a leave of absence to protect themselves), and the revolving door of new associates that comes along with the stress and anxiety of working in a Single Leader Financial Center which creates additional challenges that high traffic Financial Centers don’t experience.
Financial Centers need at least 4 associates to function at the bare minimum capacity, so when you factor in the above challenges you are now facing additional issues such as not enough staff to open and close the Financial Center and not enough staff to complete the mandatory regulated audit procedures or other minimum expectations. In addition, running on reduced staff creates such high levels of anxiety and chaos that the associates are now simply surviving the day creating fear, flight, or fight behaviors taking away from any strategic sales plans regardless of their highly pressured sales goals. This in turn creates additional stress and pressure to avoid losing their jobs from the monthly progressive discipline procedures that ultimately result in termination.
Think about a time you went into a retail store to do business; a bank, grocery store, shoe store, clothes store, etc., and the line to check out or be assisted is lengthy. It isn’t uncommon for someone to wait in line at a bank for 10 or 15 minutes or more just to see a teller or be assisted. This is primarily due to the staffing model that company has mandated in order to increase their profits. They would rather have their associates have to deal with angry clients or illegally skip lunches or breaks than lose more money from their pockets.
Yet these associates’ jobs are literally dependent on them staying calm, cool, and collected despite the level of anger, or worse, from clients. Not only is their job dependent on this, but their bonuses, raises, and promotions are dependent on this as well.
How many times have you become, or have you seen others become, angry towards the associates that work in the bank or store in question? They are running on bare minimum staffing levels to further the profits of the corporation and the high level executives and also have to endure angry clients, verbal abuse, and sometimes worse (it was not uncommon for me to receive escalations from clients irate over the long wait they experienced in the Financial Center).
This chaos results in low production and increased turnover (not to mention low morale which exasperates all these issues) which in turn creates continuous new hire recruiting, interviewing, hiring, and training expenses. Recruiting, interviewing, hiring, and training are done by managers, leaders, and executives with larger salaries who are mainly interviewing lower salary level roles. So now we are paying these leaders and executives to interview those coming through the revolving door which reduces the time they are spending driving production for profit, market share, and most importantly it takes them away from helping their teams continue to improve performance, which in turn results in increased turnover of top talent, and round and round we go.
According to this article, if you are replacing someone it can cost up to 50-60% of their annual salary. Turnover (revolving door mentioned above, caused by various poorly planned or executed processes or lack of People Focused Leaders) can be quite costly, summing up to a total of 90-200% of an employee’s annual salary.
So while running a Financial Center in Oregon with 6 associates may seem like it’s creating a higher profit margin, it is actually creating so many negative downstream issues that it ends up costing the company hundreds of thousands of dollars each time they eliminate another position. It’s a never ending perpetuating circle of waste, frustration, stress, anxiety, turnover, and ultimately reduction in profit that cannot be predicted or anticipated by looking at reports and job descriptions alone.
It is in a company’s best interest to use better strategies than simply looking at reports from levels above the areas they are looking to make reductions in. This simply perpetuating a constant stream of revenue being thrown down the drain to counteract bad decision making by Fear Based Task Managers or executives who fail to do the proper People Focused research needed to make a fact based decision.
Instead, high level executives, CEOs, and business owners will find that it is in their best interest to make reductions at a higher level and focus on providing support and resources to those on the “front lines” who are actually passionate about creating and building relationships with clients. By taking the reduction hit themselves (salaries, bonuses, roles, etc.) instead of taking from those that are truly driving results, the meat and potatoes of the company, they will in turn see a greater increase in their profits when better People Focused decisions are made.
Click below for additional context and resources;
- Blog post “Fear Based Task Managers vs. People Focused Leaders
- Blog post explaining the Fear Based culture
- Blog post “Superpowers in the Workplace”
- Hear/watch me explain many of these concepts in short videos