Across-the-board budget cuts: Incompetence or Cowardice?

October 20th, 2010 11:37 am Category: Optimization, by: Ted Schaefer

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A good friend of mine, who works for a large employer in her city, recently told me that her department’s budget, along with every other department budget that was classified as “Administration” in the ubiquitous SAP system, had to be cut by a large and specific percentage.

It didn’t matter that the “Administration” label was not uniformly applied across her organization and that some departments that were so labeled performed functions very similar to other departments that were not stuck with that label.  It didn’t matter what services each department provided, or how efficiently they provided them, they just had to cut the budget and they had to hit the number.  Incredibly, it didn’t matter that her group was one of the few “Administration” groups that actually generated revenue; in her case three times their total annual budget spend.

Unfortunately, hers is not the first story like this that I have heard.

There is no doubt that many corporations, organizations, governments and households have been hit hard by the recent economic downturn.  Each of these groups has been forced to make some difficult decisions.  So what do I have against across-the-board (ATB) budget cuts?  Basically, I think it has to be the worst way to reduce costs in an organization, and here’s why.

Let’s take a look at something that is important and familiar to all of us; the family budget.  Sadly, many families have been forced to drastically reduce spending as a result of a lay-off or furlough over the past two years.  In those cases, an ATB cost-cutting strategy just doesn’t work.  Try telling the bank that you’ve had to cut your monthly mortgage payments by 15%.  I doubt that they will be impressed when you tell them that you’ve had to do the same with your property taxes, insurance premiums, electricity and water payments, as well.  You might get lucky and be able to renegotiate your mortgage and you might get lucky if your state provides utilities assistance for people who have recently lost their jobs, but most tax assessors and insurance companies will not be particularly sympathetic.

But my guess is that you’d probably take a very different type of approach to cost-cutting in your household.  You’d probably take a hard look at all of the money that you’re spending over a month or a quarter.  You might first examine your spending to see if you could conserve on the amount you consume or if there were ways to get the same goods and services in a cheaper manner.  If that didn’t reduce your spending enough, you’d probably divide the remaining spending into different categories.   There are many different ways to categorize your expenses, but they’ll probably come down to something like, 1) Essential; 2) Non-essential, but painful to cut; 3) Non-essential and easier to cut.  If you’re lucky, you will be able to cut enough of your spending by eliminating or reducing your expenses in the non-essential categories.  If not, you might be forced to re-examine what really is “Essential.”  For example, your mortgage payment is essential, as long as you plan to stay in your house, but if the situation calls for it, you can reduce your costs by moving into a smaller home or apartment.  Not a fun choice, but it could be the right thing to do in certain situations.

Looking back on the family budget example, what did we do?  First, we looked for opportunities to conserve and less expensive ways to purchase the same goods and services.  Next, we prioritized our spending so we could make good decisions.  To find less expensive ways to purchase the same goods and services and to prioritize the spending means that we needed to 1) understand what we were getting for the money we were spending and 2) understand what would happen when we stopped spending that money.  After prioritizing our spending we made trade-offs by deciding what we could live without.  Some of the trade-offs may have been no-brainers, but some may have been very difficult.

I would argue that this is the same process that should occur in any organization that needs to reduce its spending.  It amazes me how a manager can walk into a large organization and mandate a large cut in the budget for each and every department (as they are defined in the accounting system, but that’s a different blog) without understanding where, how and why the money is spent.  It would be laughable if the results weren’t so sad.

ATB budget cuts penalize your best managers.  These are the managers that run a lean operation, who have taken the initiative to drive out all of the waste and improve productivity.  They are already doing the job you’ve asked them to do with the fewest resources possible, but they are being treated in the same manner as the manager who is either not as effective, or who has become jaded by past ATB cuts, so that he/she keeps some “rainy day” resources in the budget for just such “emergencies.”  (… and people wonder why their best managers seem to leave after these types of budget cuts, even when their positions are not eliminated.)

Let’s not forget the knock-on effect of penalizing your best managers.  The best managers often assemble the best teams to do the work.  If one or more members of a lean, highly productive, well-functioning team is forced out in an ATB cut, the rest of the team is forced to pick up the additional work of the departing team members.  This extra work, on top of an already full workload, either forces the quality of the work to suffer, or reduces the total output of the team; that is, if the rest of the team elects to stay in an organization that doesn’t value efficiency.

ATB budget cuts often fail to achieve their savings targets or result in so much “slash and burn” damage to the organization that “add-backs” must occur after the blood-letting so the organization can survive.  It continues to amaze me that these managers have the time to perform an initial ATB cut, followed by another one or by an “add back” program; but don’t have the time to do it right the first time.

ATB cuts suggest that the value of the work performed under each of the budgets is equal to the value of the work performed in all other budgets.  I have seen a lot of different organizations over my career and I don’t think I’ve ever observed this to be the case.  Take my friend’s case: her group makes money, while others spend it.  Is a cost cut that forces a reduction in revenue equal to a cost cut that has no impact on revenue?  Probably not.

So, what’s the answer?  Clearly, many organizations are forced to radically reduce costs just to survive.  I think it goes back to our home budget example: 1) know what you’re spending; 2) understand what you get for it, 3) find ways to get the same or similar things for less money, and 4) make the hard choices about what you can do without.

In the end, my experience has been that managers who drive ATB cost reductions are incapable/unwilling to understand their business processes and organizations sufficiently; lack the imagination or skills to reengineer their business processes; or lack the courage to make the hard choices about what their organization will do and what it won’t do in the future.

To all those top level managers who have instituted ATB cuts, or for those who are planning to do so: Don’t do it! Think before you act, and save your company the added burden of bad management.

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