Redundancy is a real part of business and one that we should be prepared for. Photo / 123RF
OPINION
A slowing economy can be painful and if you don’t have your house in order there’s a good chance you’ll be found out. Employees often blame the bean counters for the cost-cutting exercises but there are many stakeholders feeling the pain. So what are the considerations that go into cost cutting and why are redundancy decisions not taken lightly?
A business has several stakeholders with complex interrelationships between key stakeholders. Like it or not money is one of the key constraints of a business. It’s not too different to your family situation – if you run out of money the consequences can be catastrophic.
Recurring cash inflows come from customers and the importance of keeping them happy is obvious, although selling quality services or products at a profitable price and margin is important to longevity.
The primary funding source is investors and in return for placing their trust in the business endeavour and management, they want a return on that investment. If they fail to receive an adequate return, in the form of dividends, then the value of the business goes down, and they make a capital loss. Pressure then goes on the board and chief executive to take action. Think of how you feel when the value of the companies you own in your KiwiSaver go down in value.
Banks also provide funding but the relationship is more formal. A business relationship is a lot like your home loan mortgage, if you are making your repayments you are unlikely to hear from the bank. As soon as you break one of your banking covenants then you’ve got a lot of explaining to do.
Suppliers are important to a successful business and the ability to stop activity with them varies greatly. Property is generally underpinned by a long-term lease and the ability to stop the cost in the medium term is limited. At the other end of the scale, entertainment is easy to stop, but often not a popular option with employees. Advertising is an interesting expense as it’s often easy to stop but when you need revenue you really should be advertising more.
Staff costs, if you dehumanise them, affect real people and families and making people redundant is generally the last of the cost-saving actions to be taken and it’s an awful process to go through.
The ideal scenario is that you don’t have to make people redundant as it takes a tremendous emotional toll and can cause financial distress for those made redundant. But, it can also reduce the morale of the employees who are staying on which can affect the quality of service that you provide to your customers. A genuine lose-lose situation.
Unfortunately, if the cash coming in is lower then the pot of money to share around is smaller and all stakeholders need to take a smaller share.
The approach to reducing staff costs is generally to minimise salary increases and not to backfill people who leave. If the passive approach isn’t enough then you move into redundancies and they come in a couple of forms – the genuinely unlucky where a particular part of the business is not performing or those individuals who are underperforming. Where a particular part of the business is not performing it can often be a result of poor management decisions.
In the above scenario the revenue reduction results in a disproportionate reduction in cash for each of the stakeholders. Banks want their money first so it’s very difficult to change the level of payments to them. We have a little more flexibility in payments to suppliers and as sales drop there will be a natural reduction in spending. In this scenario payments to employees drop by 5 per cent and this would be difficult to achieve in a well-run business. Investors generally take the biggest proportionate swing in cash flow – in this case, a 50 per cent reduction.
Unfortunately, redundancy is a real part of business and one that we should be prepared for emotionally and financially, particularly if we work for corporate organisations. When making a decision on who you are going to work for make sure you consider the quality and stability of the business and how they treat their staff. If you get a sense that your business is under financial pressure then remember it is people who make redundancy decisions so be on your A game – be positive, engaged, and present.
If you have a strong board and chief executive then they will make the tough decisions.
- Glenn Dunn-Parrant is general manager – group planning and performance at New Zealand Media and Entertainment, publisher of the New Zealand Herald.