This is the fourth and final near term tactics post on a topic ever present in today’s economic climate: cost reduction. Though the US economy grew by 2.5% this past quarter and despite some willingness by companies to invest in IT (while there is a reluctance to invest in staff),  the overall corporate climate is to continue to cut costs. In this climate, IT must also deliver efficiencies, and you as a corporate leader must demonstrate that IT will do its share.  As I mentioned previously, first ensure you understand the business drivers behind the cost reduction for your company so you can appropriately shape your program in IT to meet those needs.

Assuming you have that understanding, I have recommended 5 near term areas that should provide real savings and also tighten up your organization to make it a leaner and more effective shop. It is important to note that most shops can achieve 3% to 15% reductions by executing these tactics and if done well, the changes will actually improve your longer term capacity and positioning.

As covered in the previous posts, the first area to tackle is what you spend on vendors and services or third party spend. Nest is to tackle making sure you have a ‘clean’ shop as well as pursuing consolidation and utilization efficiency initiatives. The final area, and perhaps most important area to address is staffing.

Before we get into the details of what to pursue, I need to highly emphasize that leadership is absolutely critical to ensure efficiency and reduction initiatives do not cause morale or productivity issues that compromise any gains. I have seen many such efficiency efforts have reduced impact or even result in broader disruption to the IT team and the business at large. So, understand that you are doing delicate work here that requires thoughtful decisioning and messaging as well as strong execution.

To achieve staffing efficiencies, there are three near term areas to focus. The first areas is to eliminate high priced contractors or consultants. We discussed this as part of getting a handle on third party spend but you should take a second look at it as you analyze your workforce. You should have metrics in place that tell you what your spending for consulting services is for the past quarter, the past year, by vendor, by IT area. Similarly, you should have spend metrics with number of contractors, their cost per hour or day, and by vendor and IT area. You should know how much more a consultant or contractors costs you versus a similarly skilled employee. In some cases it can be 50% to as much as 300%. If you have significant numbers of contractors or consultants providing services in areas that are not discretionary or project-driven (e.g. production or IT operations or maintenance areas), then you likely have the wrong staff mix. Can you shut down or defer discretionary projects and shift your staff there to displace contractors doing routine work? By properly balancing your workforce (an 85-95%/15-5% staff to contractor ratio for production work or a 50-80%/50-20% ratio for project work) you can optimize your cost base. By replacing contractors that cost you 50% to 200% more than you staff, you can accrue large savings very quickly.

In addition to optimizing your staff mix, you also should do a performance-based reduction. First and foremost, you must get your messaging and goals and vision nailed down before you start this. If you do not, then your organization will be rife with rumors and your best people will immediately be exposed to attrition elsewhere. Poorly executed reductions in force invariably result in a greater proportion of the best staff leaving rather than poor performers if the vision, goals and messaging are not well-communicated. Note the recommendation is for a performance-based reduction, not an arbitrary reduction in force, or a last-in first-out reduction, or anything that is not primarily merit-based. At this point you may be saying, but we have a good team, we are already stretched, we do performance management HR stuff every year, how can we absorb a performance based reduction? My response would be that if the rest of the organization is doing staff reductions, then you need to step up also. And even if only some of the organization is doing this, you should bite the bullet and do the performance reductions. Why? Because your HR processes rarely work as well as you think, and you likely have built up more bad apples and poor performers than you realize or your managers care to admit. And never let a good crisis go to waste. These bad apples and poor performers, even if few in number, really cost you and your organization. The Wall Street Journal had a great recent article explaining the outsize negative impact of bad apples. So, come up with the right messaging — that is, your target organization is a high performance organization; that these actions must be taken as a prudent step given these economic times; that these are all that is expected (but of course no guarantees); that merit and performance are the primary criteria; that you will continue to invest in training and adding key staff where it is critical (and you must back this up and do it); and that you will drop contractors first where possible (again, you must then do this).

Huddle with your managers and HR. Look for at least a 2% reduction, that is the typical minimum amount of deadwood in your organization. Ensure that where you have weak managers, HR and a strong set of peer managers closely reviews each manager’s 2% candidates to ensure no favoritism or bias. Ensure customer views of staff performance are included (but only as one of many factors of performance). And then execute in a timely and decisive fashion. Once completed, refocus the team on the job ahead. Now that you have eliminated the deadwood, many of staff will walk with a lighter step because Joe, the problem guy, is no longer causing problems. He is gone with the rest of the performance problems, and productivity and quality should rise.

The final area to address is training and graduates/interns. Typically, in cost cutting the first areas to get slashed are training and intern and graduate programs. This is penny wise and pound foolish. The ability to keep and attract the best and most productive staff is dependent on their ability to learn and do more. If you kill training, your skilled staff attrition will cost you far more than the training save. Further, how do you get improved productivity without the training? Similarly, graduate and intern programs require long runways and consistent support to have proper effect. Slashing them one year and reinstating them next year will not impress any top graduates. You are cutting off typically your best and lowest cost recruiting tool.  Again, the long term costs will far outweigh the savings.

So, instead, take the following actions. For training, huddle with your key vendors and work with them to see if they can provide greater discounts or free training. Can they come on site and offer seminars or classes for a group of your engineers (getting a better environment and  lower unit cost delivery)? Unless absolutely necessary, change training from one of your team traveling to a class to having the vendor or institution bring the trainer to your site (or videoconference) and train 10 to 14 of your staff. Thus reducing your training costs but increasing its impact. Don’t send 5 team members to one conference. Send 1 or 2 and have them take great notes, do a trip report, and hold a seminar for the team when they get back. They will treat it more serious, value it more, and generate excellent team interaction as a result. For graduate and intern programs, reduce the number of school visits, perhaps slightly reduce the number of graduates or interns, but really protect this investment. You are likely spending more for a few contractors for short term results than you are for your entire intern and graduate program which gets you long term results and high performance future.

So, in a nutshell, you have three key areas for near term staff efficiencies: balancing your workforce mix, performance-based reductions, and training and graduate investment alignment. But they must be done only when you have established clear vision and goals and you execute robust messaging so you avoid the engagement pitfalls. In sum, you can get significant near term cost reductions in this area if you execute it well as a leader.

What other areas would you tackle? Have you seen well-executed or poorly executed staff efficiency initiatives?

I will cover in much greater detail how you achieve much greater staff productivity and cost improvement as a long term initiative in the next few months.

Look forward to your comments.

Best, Jim