Pinching the Penny PinchersIdiotic examples of corporate cost-cutting.
Posted Monday, Sept. 25, 2006, at 4:14 PM ETListen to an interview with the author here, or sign up for Slate's free daily podcast on iTunes.
How do we know the economy is slowing down? The falling house prices are a clue. So are the bad macroeconomic data. And then there are the mindless, ultimately meaningless cost-cutting actions by gigantic corporations. We've reached the moment that occurs in every business cycle, before the news gets very bad, when successful companies start turning their employees upside down in hopes of shaking out a few pennies. Today, for example, the Financial Times reported that humongous investment bank Credit Suisse has told bankers to cut down on color Xeroxes and deal-closing dinners as part of a cost-reduction effort. And the Wall Street Journal, fleshing out a story broken last week by Valleywag, reported that Yahoo! "will require its U.S. workers to take vacation or unpaid time off the week between Christmas and New Year's, in a move that could signal concern about hitting some financial goals for the year."
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StumbleUponExpect many more of these nickel-and-dime stories in the months to come. Big companies relentlessly benchmark. So, you can be sure that Microsoft's human resources folks are looking into unpaid vacation policies while accountants at Citigroup are examining color-toner budgets. (After all, back in July, Prince Alwaleed bin Talal, a huge shareholder of Citigroup stock, called upon CEO Chuck Prince to enact "draconian" cost-cutting measures. When a Saudi prince accuses you of profligate spending, you know there's a problem.)
These cost-cutting efforts differ from the massive cuts seen lately at crisis-ridden companies such as Ford. Yahoo! and Credit Suisse are trying to prepare for a slowdown in earnings as industry conditions decline. Ford is fighting for its life and so is offering to buy out unionized employees, slashing the white-collar workforce by one-third, and suspending its quarterly dividend. Ford's blunt cost-containing instrument, which takes something out of the hide of everyone from assembly-line workers to shareholders, is certainly damaging to morale. But it's accepted because 1) the company is losing money and 2) everybody bears the burden. By contrast, the cost cuts at highly profitable, sturdy companies such as Credit Suisse are imposed with ruthless indifference, reminiscent of something you might see on The Office. And because they're so arbitrary and meaningless, because they're apparently designed to inflict maximum annoyance on employees, they can be far more damaging to morale.
Frequently, managers looking for low-hanging fruit impose symbolic cost-cutting measures that take away some of the few pleasures their fellow employees enjoy. James Dimon, the legendary cost-cutter who is now the chief executive at J.P. Morgan Chase, has won kudos for his merciless efforts to slash expenses at the bank. Among his triumphs: shutting down employee gyms and cutting off cell phones provided to employees.
What ends up infuriating employees is that the scrimping on minor employee perks co-exists with a pay-any-price attitude for so much else. Credit Suisse, for example, pays seven-figure bonuses to hundreds of bankers every year. Telling associates who prepare deal books that they can't print out color PowerPoint slides because the bank needs to pinch pennies seems an exercise in futility. Yahoo!'s cutback seems even more likely to infuriate. On the heels of a warning on revenues that caused its stock to plummet about 10 percent, Yahoo! told its 10,500 employees to take off the week between Christmas and New Year's. Offices will be closed, allowing workers "to enjoy guilt-free time off while helping Yahoo! reduce unused vacation time," wrote Libby Sartain, Yahoo!'s human resources boss. Assuming average weekly wages of $2,000, that would save the company only $21 million—or about the combined earnings of CEO Terry Semel, CFO Susan Decker, and COO Dan Rosensweig last year. (See Page 26 of Yahoo!'s proxy statement.) Meanwhile, Yahoo! is rumored to be contemplating a $1 billion acquisition of Facebook.
This type of self-defeating cost-cutting often occurs at knowledge businesses whose only real asset is smart, motivated employees. Docking everybody a week's pay at a time of year when 1) they're incurring high expenses and 2) a lot of their friends and colleagues are receiving bonuses doesn't seem like the smartest retention policy for Yahoo!.
To be sure, if companies were indifferent to costs across the board, they wouldn't be in business. But the penny-pinching is aimed squarely at the vast productive middle. Top executives are generally unaffected. (Do you think James Dimon pays for the cell phone he uses at work?)
As the economy moderates and as elevated interest rates continue to take their toll, it's likely we'll see plenty more such examples. Christmas/holiday parties are a prime symbolic opportunity for expense reduction. When an investment bank that took the whole gang to Vegas for a bash in 2005 instead decides to hold its party at TGI Friday's with a cash bar, disgruntled employees will leak the news to the press. Some investors may take it as a sign that management is watching the bottom line. But in the long run, that penny saved may not be a penny earned.
Got an example of mindless corporate cost-cutting? Please send it to . E-mails may be quoted by name unless sender requests otherwise.
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Remarks from the Fray:
I remember a couple of years ago working for a company who decided to do agressive cost cutting like those mentioned here. The first to go was bagel mondays. I don't think that really bothered the CEO much.
Next, the office supplies were moved from out in the open to behind the mail room counter to prevent people from taking more than they needed. This was annoying to the rank and file, but even more so to the mail room staff who were constantly interrupted everytime someone needed a new pen or paper for the photo copier. Again, I don't think that had much effect on the CEO; I doubt he got his own office supplies anyway. Then we were told to start bringing in our own cups, plates and utensils because the company would no longer buy the disposable kind for us to use.
The real kicker was when managment called an all hands meeting to discuss changes in our benefits. They told us that they had done some benchmarking and had discovered that employee health benefits were really a lot better at this company than in the rest of the industry. They really needed to cut costs and stay competitive in these tough times (blah, blah, blah) so they were changing the health insurance contribution to make them more competitive. This meant that they were going to transfer more of the cost on to the employees (my health insurance contribution went up by more than 1/3).
I'm sure all those cuts really saved the company a lot of money. So much money, in fact, that when it came time for the executives to get their new luxury company cars (as they do every year) they did not have to forego that perk and they were even able to get the custom rims, too. Whew! And we were all worried about that!
Mr Gross hit the nail square on the head with this article. If huge companies want to really do some agressive cost cutting they should start with those pricy executive perks and work their way down to the rank and file perks. If they don't spread the pain around a bit, talented employees will go to another company where they won't feel the pinch quite so much.
--ab_absurda
(To reply, click here.)
The word Gross fails to use is "oblivious."
1) Some of the cost cutting measures the big guys will take are more like corrections of bad policy than cost cuts. Unchecked middle managers happily give away the farm, convincing themselves that this or that perk is good for recruiting or morale. It's such simple things as giving out cell phones to employees who don't really need them to conduct business, knowing damn well the phone will see much more personal than business use. Taking away the phones is not regarded as a correction but a "cut." The better approach would be to admit the initial mistake, take the blame for it, and take it away ("NO employee who needs the phone for work will lose their phone." places the weight on the disgruntled employee to consider why they are upset and realize they have lost something they shouldn't have had in the first place.) Unfortunately, those same middle managers who give out all the goodies are reluctant to take credit for bad decisions, so what filters down to staff is something along the lines of "I'm opposed to this, but those meanies at the corporate office are forcing this upon us."
2) There is a rule about numbers and statistics in the news: If they are telling you about high percentages, the numbers are small. If they are telling you about high numbers the percentages are small. The individual operator of a restaurant may see five dollars a week to keep a bowl of mints in the lobby as a goodwill gesture that will pay off in the long run. Heck, it's only $260 a year, maybe a couple thousandths of a percent and every extra visit it generates offsets that percent even more. The corporate goof in a chain of 2000 restaurants sees that same bowl of mints as half a million dollars that can be cut, even though it's still thousandths of a percent, and it is a cut that the customers will notice. So will the staff, who may or may not have had a raise or even a timely review this year, and they will notice every time the boss spends a dime on anything perceived as frivolous.
What little there is to be gained is not worth what can be lost.
3) The true symbolic gesture, the one that would get everyone on line in a hurry, would be the dramatic cut at the corporate level. It would have to be more than forcing execs to fly coach. The staff would have to believe that there is real hardship involved. I'll believe any company is serious when they eliminate bonuses for non-producers and cut all bonuses across the board for anyone not working face to face with the customers.
--Ozymandias1
(To reply, click here.)
(9/25)