When faced with tough times, the first thing most CEOs do is to cut costs. Well, it doesn’t take a genius to do that. In fact, I can take a monkey in a red jacket, hand him a banana and a copy of my budget, and he will randomly select line items to cut. Most CEOs won’t do any better than the monkey. You see, in doesn’t take a genius to cut costs when times are tough…but it does take a genius to figure out how to increase revenue in tough times.
You have all seen this before. The company’s profits are down, so the CEO puts out an edict: “I want a ten percent across the board cut in expenses,” or “Have every department cut two people,” or “Find the people who make the most money and get rid of them.” None of these are based on any rational or thoughtful approach. It’s a knee-jerk reaction to a scary situation.
Here’s What I’m Talking About
Perhaps the best example of this behavior was Circuit City. You may recall that Circuit City was one of the companies that Jim Collins wrote about in “Good to Great.” It was one of those companies that did everything right and was “built to last.” So where is Circuit City today?
Circuit City went bankrupt and couldn’t even find a buyer for any of its stores, assets, etc. It’s completely gone…nothing more than a bad memory in the history of business. Its management team put it into a spiral of death by cutting the wrong costs.
Circuit City’s CEO decided to get rid of the highest paid staff in its stores, which just so happened to be the best and most experienced sales people. So 3,400 were let go, most with little or no notice, and the plan was to replace them with new, less experienced, but cheaper hires. Circuit City also stopped paying commissions and went to an hourly rate. Guess what happened. Shoppers noticed the difference in the sales staff. The newbies didn’t know anything about the products, they didn’t have a good attitude, and they weren’t very helpful. They also had no incentive to sell. Shoppers left in droves, favoring other stores like Best Buy, and the company’s sales plummeted. In an attempt to stop the sales slump, Circuit City’s management cut more jobs, and started closing repair facilities and stores. The spiral was now completely in motion, and the rest is history.
The moral to the story is that Circuit City never fully understood the value of its loyal, experienced sales staff, instead seeing them as a cost. The CEO cut the one thing that it needed to be successful because he could only see the line item on the P&L. Short-sighted? You bet!
This kind of thinking goes on all the time. When I was a salesman, I landed some big deals that got me some very big commissions. I kept waiting for my commission check, but it never came. In desperation, I went to the CFO, who had been holding the check on her desk. She couldn’t part with it because she thought it was too much money to give to a salesman. I finally had to convince her that it wasn’t her money, but my money. After all, I had earned it. She couldn’t see the value that my sales brought the company, only what it cost them. I learned something valuable at that time, which I now impart to all of my CEOs: You should never have a problem writing a check to someone who makes you money.
When times are tough, CEO’s will cut the very things that they need to remain profitable. They will cut marketing costs (the very thing you need to generate business). Or they may cut their commissions or sales staff (like Circuit City). Or they may cut their support staff (the people who keep the customers happy). If this is what you want, then get a monkey to choose which expenses to cut. But if you want to be smart about it, start identifying those pet projects that people are attached to, but drain the company of needed cash; seek out initiatives that don’t make sense anymore; or force your team to identify outdated products/services that cost more to maintain than they bring in.
As a CEO, you need to be smarter than a monkey.