As I was reading the WSJ article this week on the Kraft acquisition by 3G and Warren Buffet, I found myself asking a simple question about zero based budgeting and an obsessive cost-cutting culture.

Does a myopic cost cutting culture end up costing employers more through hidden costs?

I'm definitely one for working efficiently and reducing waste where possible and where it makes sense...however I also feel that when employees start to feel that every action is being watched and every penny spent is being scrutinized, they start to disengage. When employee morale starts to fade and this disengagement sets in, the savings from myopic cost cutting will pale in comparison to the overall hidden costs of disengaged employees, employee turnover, and decreased company agility.

Disengagement of Employees:

A recent Gallup report estimates that 70% of US employees are not engaged at work and that this disengagement of employees is estimated to cost US companies between $450 - $550 billion dollars in lost productivity each year. To put this number in a bit more context, if you take the mid-point of the lost productivity ($500 billion) from US workers in 2013, it would have qualified as the 27th highest GDP in the world, coming in right behind Norway. Disengagement is much more difficult to measure than the cost of a business trip or the cost of a photocopy because it is typically not tangible and there is not a price tag stamped on it. It is up to the company and its management team to engage employees and ensure company culture focuses on striking the right balance between cost improvements and an enjoyable human experience. If companies choose to ignore the human element and become myopically focused on cost reductions, disengagement can spread in a similar fashion to what we experience each January, with influenza. Unfortunately for companies, these symptoms are more contagious and less likely to subside with a few days of treatment. The earlier mentioned Gallup Report attempted to quantify the true cost/impact to companies' bottom lines from the rise of disengagement in the workplace: "Organizations with an average of 9.3 engaged employees for every actively disengaged employee in 2010-2011 experienced 147% higher earnings per share (EPS) compared with their competition in 2011-2012. In contrast, those with an average of 2.6 engaged employees for every actively disengaged employee experienced 2% lower EPS compared with their competition during that same time period."

Turnover of Employees:

Employee turnover costs US companies over $11 billion dollars annually as measured by the Bureau of National Affairs. While turnover is slightly easier to quantify than productivity due to the ability to place a price tag on training and development, the true cost of turnover includes items such as: the cost of lost knowledge, company intelligence, navigation, and rapport/relationships. These are all more opaque and less easy to quantify, causing this headline number to most likely be understated. While it might be true that a company can train someone in two months, the chance that this new-hire is performing anywhere near the level of the seasoned associate that left the company, within that two month period, is a pipe dream. Losing employees is especially difficult in companies that are hyper-focused on cost cutting and tend to have little overlap of key roles and positions. Many of these companies also lack the proper controls and documentation of these roles, which tends to ratchet up the risk associated to someone leaving and also lengthens the time it takes for a new employee to come up to speed. It is not surprising that as company morale wanes, the potential for turnover increases, and those companies that are excessively focused on cost cutting and less on the human experience are far more susceptible to a mass exodus. Over the past six years, this has been dampened due to a soft economy and excessive slack in the job market; however, as the economy improves and the job market tightens, this exodus will only be exacerbated. As many of these companies have or will come to find out, typically the top-performers (i.e. the employees most difficult to replace) will be the ones that reach the exit doors first, leaving these companies with high turnover, huge gaps to fill, and middle or lower performing employees left as a stop-gap.

Decreased Company Agility:

Technology has had a profound impact on the evolution of consumer preferences and demands and has given the consumer a much easier platform to research and voice these preferences and demands. This has changed many industries from the "build it and they will come" marketing and manufacturing mentality to a more on-demand/agile mentality. Companies today must be more agile/nimble and innovative in order to capitalize on consumers' ever-changing wants and desires. Unfortunately, myopically focusing on cost cutting is typically in stark contrast to encouraging innovation and being agile. A cost cutting culture and the inability to spend money discourages employees from asking for the necessary funds to take calculated risks when developing new products and initiatives. This leaves companies in a constant reactionary mode trying to adjust to new trends and demands after they have taken hold in an industry. This mentality can be so paralyzing in larger companies that trends may be missed or ignored completely only to continue with the fledgling status quo. This agility is of particular importance to 3G's recent acquisition of Kraft as the manufactured and prepared food industry is in a complete renaissance, with many smaller companies stealing market share due to the ability to be more agile/nimble and quickly react to the changing wants and desires of consumers. As with the other two hidden costs, decreased agility can be challenging to quantify; however, the decrease in market share of existing products and the lack of a innovative product pipeline are serious issues with a substantial cost. By focusing just on reducing costs and not on the evolving consumer and industry trends, these companies are dropping an anchor, while competitors are navigating and speeding by in and effort to follow the customers and the desired profits.

Balancing Act

Cost-cutting is not a bad word or some sort of scarlet letter than should be shunned or avoided. Cost-cutting and removing waste is a necessary element to consider each and every day to determine if an opportunity exists around us to perform our duties more prudently and efficiently. Where this concept starts to become detrimental is when it is myopic or all consuming to an organization. This will cause many other important facets and segments of a company, including and most importantly its people, to stumble, break-down, and at worst, completely give-up. So next time you start that new managerial position, open a new business location, or acquire a new company, take time to understand the new landscape and resources and attempt to make balanced decisions with a focus on both short-term survival/results and long-term success/engagement as this will help shine more light on the potential costs that may be lurking and hiding in the shadows.