Coldhearted? Maybe...it's just reality!

Well, perhaps by now you’ve read my somewhat cold-hearted suggestion that companies should cut employee headcount fast—and cut deep.  In the Doomsday scenario I explain that there are few excuses for not making very deep labor reductions.  Unfortunately for many European companies, however, there is an excuse: their labor laws make it much harder.  Without question, this puts them at a significant disadvantage vis a vis competitors located elsewhere in the world.

For example, in Germany a number of large companies have made a deal with the government to hold off on layoffs for six months.  Employment contracts and the expectation of lengthy severance arrangements also make it difficult.  In cases where staff can be reduced, severance arrangements often mean that there’s no real financial benefit for months.  The need to downsize right now is not to reorganize a company for future profitability—it’s survival.  So if you’re going to be paying severance for the next six months, what have you really gained in the short term?

What this means is that many European companies (and my clients) need to consider a different approach than their leaner, more ruthless American counterparts.   Instead of reducing staff—they need to put their staff to work.  Think about it.  If business is down by 20 percent, then speaking at a very general level, there should be a lot of staff with 20 percent free time on their hands (of course there’s not a perfect correlation, but you get the point).  What can we do with that 20 percent of the time?  One thing is to actually start “InSourcing” work that was previously outsourced.  Outsourcing is usually seen as resulting in cost savings, but if you have idle staff, the opposite is often true.  Another is to turn them all to driving efficiency in other processes.

That’s where the tools of continuous improvement come in (such as lean and six sigma).  Idle time is a great time to train people, and those people should be put on cost savings projects immediately.  Focus on processes that produce savings in raw materials, consumables, contract labour and overtime. For example, BMGI recently guided Graphic Packaging’s Bristol, UK facility through a lean project that resulted in a substantial  reduction over time, and reduced scrap waste by ₤80,000

You may very well need help teaching employees new skills, but there are very cost effective ways of doing that today, such as with web-based training. Even coaching can be done by telephone and chat room as well as face-to-face to make it inexpensive relative to the cost savings associate with improvement projects.

What’s important is that you engage your entire workforce, from top to bottom, in an effort to identify cost-cutting opportunities. Taking Graphic Packaging as an example again, three Kaizen events were conducted with the company’s machine operators and uncovered immediate savings equivalent to in a 3:1 return on investment.  This was the first time that this group had been allowed to provide their perspectives on the production process in a formal environment which resulted a dramatic change in the culture of the workplace – employees felt involved and valued resulting in a willingness to move forward - GPI claim this to be more beneficial than anything they have done before because it means long term, sustainable results through understanding and involvement.

Non-headcount costs that companies are able uncover and eliminate can be huge.  Our European division is now offering firms a two day Performance Excellence diagnostic at no charge– conducting what is in effect a “mini” Kaizen workshop – during which we guarantee we will identify at least €250 000 in savings for any company with more than €300 million in revenues. For some, driving cost out of operations will prove a necessity for survival and we’re committed to ensuring our clients make it through these tough times.

The real point is that you need to PUSH people hard to use their free time effectively.  Look at any outsourced service:  janitorial services, transportation services (driving people to the airport, for example), maintenance services, etc.  If your people have 5 percent, 10 percent or 20 percent of their time free, you MUST focus on how to convert that time into money.

BMGI is offering to help businesses beat the recession with a two day Performance Excellence diagnostic at no charge. Click here to find out more.

Comments

[Tjerk Dijkstra]

David,
In the Netherlands the government is now predicting a GDP decline of -3.5 % for 2009. Some say this is still optimistic. Anyway I totally agree in your blog that idle staff should be used to make existing processes leaner and reduce costs and find cash. Because in this crises "Cash is King".
Tjerk

[Maxim Korenyugin]

Dave,
I have 3 students from an Aluminum Plant in my Black Belt class.
Their situation is not different from what you see anywhere else. Aluminum prices are down 40% compare to year ago, electricity costs are up and sales are down. So they plan to lay off people - but since most of operators have been working for 10-20 years, they will see cost improvements in 12 months at best.
At the same time each project the students run has potential savings of hundreds of thousands Euros - with immediate effect. Plus they might even go for a patent since one project team came up with an inventive design for Anode construction. So - their management team recognized potential of the program (they almost considered to create "Lean Six Sigma P&L center"). As soon as the projects are completed, this will be very serious argument in favour of bringing some people under this "LSS P&L center" instead of laying them off.
I can see that this type of initiative can be run as internal venture investment program - similarly to Open Innovation structures used by some Hi Tech companies. Company invests into salaries of people going into project (which have to be paid even if they are laid off) and participants invest their time (rather then spending the time trying to find a job).
I also believe that the key point in convincing management of the companies is to show success (and quickly). This may change their minds of re-deploying people rather than firing them. And success stories can be generated through small quick pilots run by either external consultants or by their own people mostly trained on the job.
All this fits quite well to what you said.

Regards,
Maxim Korenyugin