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Crisis: Best way to cut costs

November 10, 2008 10:44 IST
On November 3, India Inc assured the Prime Minister that they will do their best to cope with the current economic crisis without resorting to job losses.

Not a day passed in the past few weeks without news of imminent and real job losses, which has significantly reduced employee morale in all sectors of the Indian economy.

In service businesses like airlines, tourism, banks and insurance, this is disastrous as employee morale is one of the most significant factors that affects customer satisfaction, customer retention and hence, organizational profitability.

Given the serious financial crisis, and the obvious pressures on corporations to stay afloat and survive the crisis, is there no way other than employee retrenchment to cut costs?

In fact, there are several ways of cutting costs which can not only improve employee morale but also make the corporations come out of the crisis much stronger. In this brief article, let me suggest some of the ways of doing this.

First, let us learn from an age-old Japanese tradition. Keitaro Hasegawa, in his  Japanese-Style Management (Kodansha International Ltd, Tokyo, 1986) says it is customary for Japanese CEOs to personally guarantee the loans made to their corporations.

Among the first duties of a newly appointed president is to affix his seal to such personal guarantees. While this is not a legal requirement, it is a widely followed common practice. In the event of bankruptcy, the president will forfeit all his private assets to the creditors of the company. In his book, Hasegawa cites the case of the President of Kojin, whose palatial residence in Denenchofu was handed over to the creditors of the company when Kojin went bankrupt.

Thus, while the top management earn much more than the lowest wage earner in a company in good times, they are the ones who take the first blows when the times go bad. Top management will normally cut their salaries, followed by the next layers in strict sequence and only finally, will the lowest wage earners be asked if they too would volunteer to reduce their salaries.

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Lest the reader dismiss this reference to Japanese ways of doing things as something that will work only in Japan, let me cite two other examples from the western world.

In the early part of the 20th century, when Cadbury's was in dire straits, Sir George Cadbury personally bankrolled the company for six months. He had worked out that there was just about enough money in his personal control to (a) continue to run the company for six months with a view to turn it around and then, (b) if that did not work out, settle all dues owed to creditors, suppliers and employees. That Cadbury's turned around within those six months and is still a respected name around the world is in no small way attributable to the values that Sir George infused into the company.

In 1982, when 18 major US steel companies recorded a combined loss of $3.2 billion, two steel companies in California -- Nucor Corporation and Chaparral Steel -- recorded profits. The secret behind their success was that they had done what the Japanese would have done.

First, their top management cut down their salaries by 50 per cent, then the administrative officials responsible for the production division cut down their salaries by 35 to 40 per cent, and only then was the income of the hourly staff cut down by 20 to 25 per cent. Not a single employee was retrenched. That the entire organization had jointly tightened their belt and seen the crisis through as a cohesive team should be obvious to anyone. This was in California and not Japan! (For more on this, readers can refer to my book, Thresholds of Motivation, Tata McGraw-Hill, 1993)

Yet another way of cutting costs without resorting to retrenchment is what we did in the Taj Group of Hotels in the early 1990s. When the Middle East exploded following Saddam Hussein's march into Kuwait, tourism and hotels was among those Indian industries that got badly affected badly.

As the crisis escalated in August/September, the beginning of the tourist season in India, we witnessed mass cancellations of hotel bookings. In the Taj Group, we knew that we were in for a bad year. Rather than taking the axe out to cut employee force, we did something quite different. We ran "cost-reduction" workshops in all hotels, where employees were asked to come up with suggestions on how to cut waste and unnecessary costs.

We assured them that in the best traditions of the Tatas, we would try our very best to jointly cope with the crisis and did not threaten them with mass retrenchment. Employees responded with literally thousands of suggestions and we rode the storm jointly and came out much stronger as a team when the crisis ended. In one hotel, we cut food costs by 10 per cent, largely because of suggestions that came from the lowest rungs of the kitchen staff.

As Richard Bach once wrote, "Every problem has a gift in its hands." The current crisis, albeit the worst of its kind that we have faced since becoming independent, can still be converted into an opportunity by true leaders who are ready to lead by example -- like the captain of a ship that is in troubled waters...and the Japanese, Nucor, Chaparral, George Cadbury and Tatas. All it needs is the willingness of top management to first tighten their belts before they start asking others to do so.

The author is a senior academic at the University of Buckingham, England, and Visiting Professor at the Indian School of Business, Hyderabad. He was earlier VP (HR), Taj Group of Hotels, and Group VP (HR), Wipro Group.

V S Mahesh
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