Cost cutting our own throats: February 22, 1999 issue of New Thinking

February 22, 1999 New Thinking:
Cost cutting our own throats

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February 22, 1999

Cost cutting our own throats

By Gerry McGovern

For a number of years now, the business world has been on a cost cutting extravaganza. Wherever the modern go-getting business person goes today – wherever they look and whatever they look at – they are always asking the same question: Can I cut costs here so as to maximize shareholder value?

The business world has become a sort of vampire, sucking costs from its own ankle. Many companies have forgotten how to grow through the creation of value. Rather, they grow through acquisitions and mergers. Mergers are not really about growth but rather about consolidation and cost cutting.

Here’s a merger equation: We have 10,000 employees. You have 10,000 employees. We have 100 offices. You have 100 offices. Let’s merge! Then we’ll only need 15,000 employees and 150 offices between us, and hey, we’ll save rakes by integrating our back offices. Maximizing shareholder return, or what!?

Where is the customer in the equation? Oh, the customer will get a more efficient, broader range of services from a company with a longer name. The customer may have to travel longer to one of the company’s offices, but, hey, who needs offices when you have the Internet. The employee who the customer dealt with for several years may now be fired, but sure a change is as good as a rest.

Around 1994, when the commercial potential of the Internet was first trumpeted, the word that kept being used again and again was ‘cheap.’ The Internet was another wonderful tool to help you cut costs because, really, all business technology was about cutting costs.

It is one of the great myths of the modern age – perpetuated by the computer industry itself – that computers substantially cut costs by increasing efficiency. The computer industry has rather created a Technology Upgrade Treadmill. As Stephen Roach of Morgan Stanley pointed out in 1997, "60% of annual corporate IT budgets go toward replacement of outdated equipment and increasingly frequent product replacement."

Even in this age of growth and prosperity, it would seem that precious few are focusing first on growth, quality, service, staff loyalty and customer satisfaction. Rather, the religious cost mantra has been chiseled into the mind of business.

This mantra was well-articulated by Robert Aylong, British Airways chief executive who recently told Newsweek that, “Our job is to find ways of reducing expenditure while increasing the value for money that our customers get.”

In some ways, the consumer has become a willing player in this zero sum game of cost reduction. We want things cheaper and now we are paying the price. Service is becoming a nightmare as nobody knows how to or is willing to fix anything anymore.

I booked a ticket for a concert yesterday. It was a Dublin phone number by I ended up in England somewhere. I nearly got a venue in Manchester and after having slowly talked through my name and address, I was told I was the easiest Irish address he’d had all morning. I was charged an extra IEP5 for this ‘service.’

There is only so much fat in the world. There is a point below which reducing cost means reducing quality and reducing service and support. And while we may get cheaper prices we will end up paying with our time and frustration.

Gerry McGovern

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There is a point below which reducing cost means reducing quality and reducing service and support.