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|In: Leadership|Last Updated:

“We need to get our costs in line with our revenue.”

Welcome to Charybdis, the Business Spiral of Death.

A recent column stated that, “… cost-cutting is always a bad goal.” It garnered quite a bit of attention, some unflattering. Especially among financial professionals, who report income and expenses to Wall Street (and who, as all messengers throughout history, receive the blame), my proposition was infuriating.

Nonetheless, cost-cutting for the sake of cost-cutting is always a bad idea — the accounting equivalent of IT’s “technology for the sake of technology”.

Income and expense are tied together — each drives the other. Try to increase revenue without increasing expense and you’ll burst at the seams. Expect to cut costs without affecting revenue and you’ll fall into Charybdis, never to return, because each round of cost-cutting will further reduce revenue, leading to yet more cost-cutting until nothing is left.

When a business’s income and expenses are out of balance, it’s a symptom. You can no more cure your business by cutting expenses than you can cure a fever by dropping the patient in an ice-water bath. (Nor by giving the patient aspirin — reducing fever actually prolongs illness … but I digress.)

If income and expenses are out of balance, the first thing to do is to figure out why. Are your products overpriced? Look for ways to reduce costs without compromising quality or customer service. Perhaps you can reduce margins, maintaining profitability through increased volume. Perhaps you can squeeze costs out of your supply chain. Often, there’s an opportunity to shift some customer service to the Web, at lower cost than through your call center. And in the call center, you might be able to use CTI to cut talk-time, reducing service costs without reducing service.

Product pricing is just one possible diagnosis. In this very issue of Infoworld you’ll find lots of bad advertising — another common problem. Cutting the marketing budget won’t fix bad advertising, of course, but neither will spending more. That’s the good news. If your problem is bad marketing, don’t cut costs. Change ad agencies, and maybe your CMO.

Sometimes, the marketplace is shrinking. If you’re selling buggy whips and Henry Ford just put the Model T into production, it’s time to get into a different business altogether. You aren’t going to do this by cutting costs — developing a whole new product line requires investment. Cutting the costs you devote to making and marketing buggy whips is, however, a good thought.

Another common problem occurs in companies that own a marketplace. Either because they enjoy a monopoly or because they got to the marketplace first, revenue is almost automatic and margins are ludicrously high. The usual result is that the company gets sloppy. In ConsultantSpeak, too much money goes into “non-value-adding activities”.

Eventually, competition happens and profitability plummets. But even here, across-the-board cost-cutting easily backfires, because all too often, what’s cut depends on political clout rather than on market impact. Getting sloppy simply means there are lots of small problems to fix rather than a few big ones.

Corporate executives face constant pressure from Wall Street to appear lean and attractive. When poor profitability erodes that appearance, they’re tempted to look for quick fixes.

Professional models face similar pressure to remain lean and attractive. We call their quick fix bulimia.

What shall we call it in business?

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|In: Leadership|Last Updated:

Before you read this column, pull out your company’s organizational chart. Put a G next to individuals who always seems to get along. Next, put an S next to those who generally speak their minds, regardless of the issue or its popularity, and a P to denote those who pick their battles, only speaking their minds on a few issues.

In the best companies the Ps dominate (they’re P-rated), because leaders know how to focus their energy on what’s important. I’d rank S-rated companies second, because issues at least get raised and thrashed out, even if the process is more raucous than it needs to be. S-rated companies can be a lot of fun, once you get used to it.

G-rated companies rank last, because their leaders avoid any discussion that might cause hurt feelings or cause conflict. G-rated companies are almost guaranteed to slide into mediocrity, because the only programs put into action are the safe ones. The Gs dominate most American companies today. Getting along is their core competency.

How do companies get to be G-rated? Lots of factors contribute, but one of the most pernicious is the so-called 360-degree feedback program.

360-degree feedback programs seemed like such a good idea. Instead of being subjected to their manager’s narrow perspective, employees get reviewed by peers and “internal customers” (ugh!) as well, so they get a more complete picture of their performance, or so says the theory.

It’s a good theory. Sadly, it suffers from both bad execution and the law of unintended consequences.

Bad execution? Yes, it’s frequently bad, and sometimes execrable. I’ve seen the forms used by several companies; many asked only social questions: “Was the employee pleasant to work with?” “Does the employee work well in a team environment?” “Does the employee show a customer-service attitude?”

I once asked the coordinator of a company’s 360-degree feedback program why her form had no questions about job performance. Her non-verbal response was as though I’d noisily eructated. Her verbal answer? “We think that will come through from the questions we did ask.”

Even when done well, the unintended consequences of 360-degree feedback will usually outweigh the intended ones. Performance appraisals determine salary increases, bonuses and promotions, and have an impact on self-esteem as well. Faced with 360-degree feedback programs, employees tend to act so as to generate good feedback, which means these programs quickly degenerate into popularity contests. Who’s going to take an unpopular position with a 360-degree feedback program in place? It’s better to get along.

Managers often use 360-degree feedback as an excuse to avoid their own leadership responsibilities. What was supposed to be 360-degree feedback becomes something less, because now the manager’s perspective is missing. Managers are supposed to set goals and hold employees accountable, so when their perspective is missing, so is accountability. Heck — the people providing all the feedback don’t even know what goals and priorities the manager established, so it’s easy for feedback givers to become confused about where a given problem begins.

360-degree feedback isn’t worthless. It can be a useful source of information for managers, so long as the manager applies good judgment in evaluating the results.

But that’s about all it’s good for.

Unless you want to work in a company where everyone concentrates on just getting along.

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