Business productivity and cost cutting: Why slashing staff might not be a quick fix
By Peter Meyer, Principal consultant, Elkera Pty Limited
21 February 2025
Small and medium enterprises (SMEs), and many large enterprises, face fierce competition, rapid technological change and price pressures. There is intense pressure to cut costs. Often, the first instinct is to reduce headcount. After all, payroll is usually one of the largest business expenses.
Can effective cost cutting be as simple as slashing staff? How does it work out over the long run? Is cost cutting the right way to frame the problem in most cases?
Clearly, some businesses can face rapid changes in their prospects and may have to take drastic action to cut costs. This article is not about those cases. Rather it is about business, particularly SMEs, that have some time to consider the best way forward and who are still optimistic about their prospects.
What if the objective is framed as one to maximise productivity? Would that lead to a better outcome?
Productivity is a measure of output of a process against the input, or resources, required to produce it (Source: Investopedia).
When thinking about cost reduction framed as improving productivity, there are two steps to consider: What outputs does the business produce, and what is the most efficient or productive way to producing them?
If management focuses on productivity, it is necessary to take the time to understand the business outputs and the opportunities for process improvement. The goal is to achieve the lowest sustainable cost levels that are required to create valuable outputs. It is a slower process, but it’s the difference between treating a symptom and curing the underlying problem.
In this article I compare the two approaches and show why starting with process improvement is almost always the best route to improved productivity and sustainable cost management. The two approaches are broadly shown in the diagram accompanying this article.
Approach 1: Immediate staff reductions
Under this approach, management chooses from a variety of approaches to select staff for termination. Staff reductions are likely to be quick and traumatic.
After the staff reductions, management may say that they have cut costs going forward. Lower costs will show up in future financial reports. Job done!
Remaining staff will balance emotions of sympathy for their lost colleagues, fear about how they will cope without them, and a feeling of relief at having survived. They will hope that the worst it over and that the business can move forward on a sustainable footing.
How does that work out?
Advantages of immediate staff reductions
Immediate staff reductions may be justified in emergencies, where a business is hit by unexpected events that threaten its survival.
Otherwise, the key benefit is an immediate, apparent reduction in future staff costs.
The adverse effects of immediate staff reductions
A cost cutting approach based on immediate staff reductions is likely to produce a range of adverse effects.
Damage to long term strategy: When executed quickly, staff reductions are likely to occur in an arbitrary way across the organisation. It is a common problem for senior management to not really understand the detailed business processes involved in delivering the business outputs.
There is a risk that the selection of staff for termination of employment will be influenced by internal political considerations and personal relationships.
Under those circumstances, poor decisions are likely. Many truly valuable people may be lost and some who could be dispensable may be retained. Departments or work units with high strategic value may be left under resourced. Opportunities to reduce staff in other departments or units that could sustain higher cuts may not be identified.
Increased workloads on remaining staff: Unless there are changes to systems and outputs, the remaining staff must produce the same business outputs as before. Many employees will feel increased demands and stress. Some may leave. Others may experience burnout. Burnout is an organisational problem (McKinsey Health Institute Addressing employee burnout: Are you solving the right problem? May 27, 2022). The business is likely to experience costs associated with higher overtime, burnout injury claims, sick leave, loss of experienced staff, reduced motivation, and recruitment and training.
Loss of existing and future customers: With fewer staff or with less experienced staff, it is very likely there will be higher error rates, slower response times and reduced service quality. Customer service may be degraded. The business may lose customers who can find alternative sources of supply.
It is also likely that the capacity of the business to innovate will be reduced by the staff reductions. Reduced innovation is likely to lead to the loss of future business.
Inefficient business processes are retained: The business has not devised new ways of working or acquired new software tools for process automation. There may be some improvements as remaining staff are forced to innovate, but such changes are likely to be modest. Real change will have to be made in the future.
Conclusions regarding immediate staff reductions
As a result of those factors, it is likely that estimates of expected savings will be overstated.
That’s not all. The business has not addressed its fundamental productivity problems. The costs of planning and implementing true business process improvement will have to be recognised if the business is to solve its real problems.
Approach 2: Focus on productivity to optimise business processes before reducing staff
Under this approach, management first initiates an expert review of existing processes to identify areas of waste and opportunities for process improvement. Solutions might range from using software for process automation up to dramatic changes in the way the business is configured. Once the process analysis is complete, a change plan can be developed.
Most likely, the business will have to acquire new software tools to support process automation if it is to achieve maximum productivity and cost savings. Thus, full realisation of benefits may take some time.
In my experience, it is rarely necessary to wait for new software acquisition to realise some benefits. Most businesses undertake some processes that are unnecessary or that could be done in a more efficient way without costly software tools. In most cases, effective change should occur incrementally, rather than as a big bang.
Advantages of a productivity focused approach
A properly conducted business process improvement strategy ought to produce the highest level of sustainable savings (McKinsey & Company, A better way to cut costs, October 2009).
Evidence based change planning: If process analysis is undertaken by an expert, the real problems and opportunities should be uncovered. Change planning will be based on an accurate understanding, rather than superficial or incorrect assessments.
Increased employee engagement: An expert driven process analysis will ensure that all stakeholders are involved and brought along on the journey. In my observation, non-expert, in-house assessments often do not adequately consult all stakeholders. They often lack transparency. A well-structured approach provides clarity and boosts staff morale. It creates an awareness of the need for change and builds support for specific changes.
Improved productivity: Process improvement should remove bottlenecks, automate tasks and remove unnecessary activities. Productivity should be improved.
Sustainable cost savings: Streamlined processes reduce the need for resources, leading to long-term efficiency gains.
Better customer experience: Enhanced processes improve service delivery, and strengthening customer loyalty and reputation.
Strategic scalability: Optimised processes create a foundation for business growth and are likely to minimise uncontrolled future growth in staff numbers.
Disadvantages of the productivity focused approach
Up-front investment: A planned approach requires an upfront investment of time and resources for analysis and implementation. Managers need to be willing to make that investment to maximise the benefits.
Slower cost savings: It may take some time to realise cost savings.
Change management challenges: Change is never easy. Even with the best planning, some staff resistance may slow progress.
Expertise is required: Effective process improvement needs a skilled business analyst and process improvement specialist.
Short-term disruption: Process re-engineering may temporarily disrupt operations as new workflows are introduced. In contrast to immediate staff reductions, effective change planning can mitigate this problem.
Which approach works best?
A comparison of the benefits and costs of the two approaches leads to a clear conclusion. The immediate staff reduction strategy is likely to waste valuable time and resources. It is likely that cost savings will be overestimated. The business may be damaged and underlying productivity problems will be left unresolved.
A productivity focussed approach will take time but it ought to produce a more sustainable cost structure. It will better position the business for future growth.
The key elements of a planned approach
Define your objectives: Be clear about the problems you are trying to solve and the expected outcomes.
Engage an expert business process improvement consultant: The right expert should have these capabilities:
- quickly understand the business fundamentals and see the big picture,
- establish trust with all stakeholders,
- undertake efficient business process analysis and facilitate effective change planning,
- elicit and define effective software requirements for procurement, assuming that process automation is required.
Conduct a process review: An expert can work from an overall understanding of the business and its outputs to analyse relevant business processes and identify opportunities for improvement.
Involve all stakeholders: Ensure that all relevant stakeholders are consulted and brought along for the journey. Frontline employees generally know where inefficiencies hide, although they may need guidance to envisage new ways of working. An expert analyst can help employees to see the benefits of change. In my observation, internal reviews have a tendency to ignore important stakeholders and lack transparency.
Plan for automation: Many inefficiencies can be addressed through process streamlining and automation. Most likely, new or upgraded software will be required. Ensure that there is a process to define requirements to support an effective solution framework and procurement process.
Ensure there is a business case: Any capital expenditure must be based on a business case. First define the expected benefits from process improvements to determine an acceptable level of investment in requirements development and software acquisition to secure those benefits.
Conclusions
Cutting staff may feel like a quick win, but planned process optimisation is the fastest route to improved productivity and sustainable cost savings.
