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BUDGETING

Why Smart Companies Aren't Cutting Budgets Next Year

Cutting costs isn't what makes a company thrive. Conversely, it can be distracting and dangerous.

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If you look at many industrial disasters, you will routinely find two culprits: sleep deprivation and cost-cutting. The latter is implicated because, in recent years, cutting expenses has often been necessary and even where it wasn't, it has felt like the right thing to do. Cash is king and the king demands preservation.

Cutting expenses is the easy way to make a business more profitable and to simulate health. So why is it so dangerous? Here are the reasons I've seen as business owner.

1. It's distracting.

Truly successful companies thrive because they make something people want--and they price it appropriately. The first part of that sentence is the important part: Make something customers crave. If you do, they'll pay for it. If you don't, lowering its price will merely disguise the fact that your product or service isn't highly valued.

Costs aren't irrelevant but customer-satisfaction is decisive. All that time that managers spend poring over budgets to extract dollars and cents is better spent developing products your customers cannot live without. It's more fun and a lot more sustainable to grow your way to prosperity.

2. Margins are safe.

At BP's Texas City refinery, cost-cutting was pursued so enthusiastically that everything was cut, it was said, down to the pencils. But this made the plant unsafe because there was no spare capacity--in people or machinery. When things went wrong, which they did, frequently, there was no one and nothing with which to effect a repair. Even before an accident in which 15 people were killed in 2005, fatalities ran high and morale ran low. This is a bad context in which to do complex work.

It's fashionable to imagine that companies have layers of fat which, if removed, will make the business more attractive. I always used to believe this and would hack away at budgets with Calvinist zeal. What I learned was that saving pennies cost me: in commitment, engagement and imagination. Why bother having ideas if people feel there's no money to develop them? Why experiment or dream if there's no capacity for anything but the bare minimum? Yet a little redundancy--in people or cash--is what you need when suddenly an employee has a great new idea, a customer doesn't pay or a key hire is out sick. Austerity is a high wire act--and it's literally exhausting.

When engineers talk about robust systems, they typically mean systems which have deliberately designed over-capacity. They are designed to fail safely. This is how risk is reduced. It's an excellent model for thinking about your budget and your people. Is there enough spare capacity for a crisis?

Last updated: Dec 18, 2013

MARGARET HEFFERNAN is an entrepreneur and author. She has been chief executive of InfoMation Corporation, ZineZone Corporation, and iCAST Corporation. In 2011, she published her third book, Willful Blindness.
@M_Heffernan




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