Executive hatchet jobs and other misguided cost cutting exercises
Part 1 in a 4 part series on Drucker strategies for weathering the economic storm – Organized Abandonment
The U.S and the EU are facing the prospect of low and slow economic growth for the balance of this decade. Most economists believe the decade will be characterized by mounting deficit, rising unemployment, sovereign credit downgrades, increased interest payments, galloping inflation, misguided economic policies and a host of other economic ills. In this environment, how can managers guide their companies to not just survive but thrive in these turbulent times?
This article is the first in a four part series looking at 4 key Drucker strategies – Organized Abandonment, Continuous Productivity Improvement, Exploiting Success and Innovation – you can immediately put into practice in your own business. This article looks at why cost cutting rarely works and how you need to constantly evaluate what you should (and shouldn’t) be doing.
A mini-ebook with a complete list of the four strategies discussed in this article series is available for free in an easily downloadable form here.
Drucker wrote extensively about abandonment. Recognition of this concept is probably the single most important tactical guideline in the quest for economic results.
Abandonment of the unproductive and obsolete is the only real way to practice successful cost-cutting… and being able to achieve more with less.
Abandonment means concentrating on result areas
Drucker asserted that abandonment and concentration are opposite sides of the same coin. By abandoning unproductive and sidetracking activities, executives increase their effectiveness by having more time to concentrate on result areas. We suggest you read this paragraph again.
We believe the way Drucker linked abandonment to concentration gives real meaning to the time-worn phrase "less is more."
Every organization has to cleanse itself of the products, services, and ventures that absorb resources but in reality have become "yesterday’s news" They prevent the organization from concentrating on today's most promising result areas.
This insight is easy to understand but hard as nails to execute. It takes practice, practice, practice. But it will eventually click. Stay with it and the "aha" moment will eventually arrive – we hope.
To dominate you have to concentrate
Concentration is the key to economic results. Drucker often said: "Managers must concentrate their efforts on the number smallest number of products, product lines, services, customers, markets, distributive channels, end-uses, and the like that produce the bulk of the revenues."
No other principle of effectiveness is violated as constantly today as the basic principle of concentration.
Many of today's universities and colleges moving into web-based degree-granting and certification programs are trying to be all things to all possible markets, and will inevitably fail.
They should be concentrating on a small number well-defined niches where they have an established core competency and can provide superior customer value… and grow those niches via usage of portals with a global reach.
Effective cost control requires abandonment
Focusing resources on results is the best and most effective cost control. Get rid of non-result areas and concentrate efforts on areas that can produce significant results.
Cost, after all, does not exist by itself. Said Drucker: "Cost is always incurred – in intent at least – for the sake of a result…. What matters therefore is not the absolute cost level but the ratio between efforts and their results… No matter how cheap or efficient an effort, it is a waste, rather than a cost, if it is devoid of results…
… Maximizing opportunities is therefore the principal road to a high effort/result ratio and with it to cost control and low costs."
One truly effective way to cut costs is to cut out an activity or program entirely. If our economy goes into a tailspin many organizations will inevitably resort to "hasty hatchet work." Drucker called this "amputation without diagnosis."
To try to reduce costs is rarely effective. There is little point in trying to do cheaply that which should not be done at all. By working systematically on directing efforts and resources toward opportunities and results maximizes the productivity of an organization.
Put bluntly: Abandonment of low-yield programs and activities is the only sure-fire way to reduce costs and increase profitability.
Once more: Every organization must be able to move scarce and expensive resources – especially first-rate people – from areas of low productivity and non-results to areas of opportunities for achievement and contribution.
This requires the ability to stop doing what waste resources rather than maximizes them.
How to get started in the abandonment process
Drucker offers us some sage advice on this issue. He pointed out that savvy executives never start out with what should be abandoned: "They start by thinking through what should be strengthened and built. They do not start by trying to save money. They start by trying to build performance."
After it's decided what should be strengthened, the process of deciding what should be abandoned begins. No nation or institution has infinite resources. Resources must be freed–especially, first-rate people–to work on the opportunity areas.
Every organization, stressed Drucker has to adhere to the following prescription to increase organizational productivity:
1) Abandon the things that do not work, the things that never worked; the things that have outlived their usefulness and their capacity to contribute
2) Concentrate on the things that work, the things that produce results, the things that improve the organization's ability to perform; and
3) Analyze the half-successes and the failures. Achieving more with less requires abandoning whatever does not perform and doing more of whatever does perform.
Abandonment can take different forms
Drucker strongly suggested organizations develop abandonment policies that call for monthly meetings to seriously discuss the what to abandon and how to abandon – – from products to personnel policies.
Further, he highlighted the fact that abandonment may take different forms. The right answer to abandonment may be to do more of the same but to do it differently.
Drucker gave the following example:
"… Every book publisher knows that the bulk of its sales (some 60%) – and practically all of its profits – come from the "backlist," that is, from titles that have been out more than a year or two.
But no book publisher puts resources into selling the backlist. All the efforts are put into selling new titles.
A major publishing firm had tried for years to get its salespeople to sell the backlist without any success; but it also did not itself spend a penny on promoting it. Then one outside director asked: 'would we handle the backlist the way we do if we went into it now?'
And when the answer was a unanimous 'no,' she asked: 'What would we do now?'
As a result the firm reorganized itself into two separate units: one buying, editing, promoting and selling the new titles in the current year; one promoting the backlist.
Within two years backlist sales almost tripled – and the firm's profits doubled."
Still another example comes from a Forbes magazine interview with Michael Milken:
"'In 1979 people told me Lorimar was going bankrupt. But Lorimar could be made more profitable overnight. Just stop making movies. Over a couple of years, they lost $50 million making movies.
But it had its other asset, this terrific asset which was obscured by the movie losses. It had a library of TV film on the books for very little that was worth a huge amount.
So we used this zero-book-value asset for financing based on the value of the library for TV syndication. No one had ever done that before. That was real value added.'
Every organization should systematically ask two questions:
1. What should we abandon? and;
2. How should we abandon it?
If this is not practiced systematically, abandonment decisions will always be postponed indefinitely.
Summary of Drucker Strategy #1
With all the talk today about "achieving more with less," it's strange how seldom the topic of abandonment enters the discussion.
The key to achieving more with less is to develop abandonment policies.
In the times we're about to enter, every organization–– business or non-business public service institution needs to develop policies for abandonment. Organized, continuous, disciplined efforts are needed.
If you’d like to read more, a short e-book detailing all four Drucker strategies is available for download for free here.
For further reading in this series see:
Strategy 2: Continuous Productivity Improvement - Why small, continuous improvements are better than constantly shooting for the moon
Strategy 3: Exploiting Success - Stop calling them problems, dammit, they’re opportunities!
Strategy 4: Innovation - Innovation suffers when everyone's too busy getting through today