McLaughlin Method Founders Beware: Think Twice Before Cutting These Costs — McLaughlin Method

I cringed as I read about the recent memos from Y Combinator, Sequoia and other investors advising tech founders to cut costs in the hopes of “staying alive.”

Time and again, I observed tech founders and all C-Suite folks make choices to “cut costs” that send their company into a freefall of customer churn and employee turnover.And it is hard to come back from that without an influx of cash (which the investors are saying might not come for up to 24 months).

Remember, I’m of the mindset that leaders aren’t intentionally waking up and thinking “how do I make the lives of my employees and customers miserable?” And so these problems of customer churn and employee turnover need to be important caveats on your journey to looking at cutting costs.

So founders: when you hear “time to cut costs,” where does your mind immediately think of?

In this article, I’ve outlined common areas that founders might consider first for cutting costs – why you might consider them, and the real impact of cutting in that area. You’ll find actions that a Deliberate Leader would take when evaluating each.

“Cost Centers”

Much of my career was spent working with customer service, support, success, organizations. I am obsessed with customers and caring for people by making a tiny moment of their day positive. These orgs are frequently referred to as “Cost Centers” because they represent a huge line item on a company balance sheet – without bringing in much revenue.

At face value, it could “make sense” to cut something that’s not bringing in revenue. But these types of cost centers are at the core of your customer relationships. Customers are the ones that keep the lights on. Happy customers get you other happy, long-term customers. Angry customers write scathing reviews which keep away prospective customers.

Customers start looking for other solutions when they can’t get their questions answered due to long hold times. Support team members stop caring about giving a great customer experience when they’re overworked, stressed with high call volumes and wait times, and get criticized for their call times or metrics without understanding why.

Deliberate Leaders: Get the leaders and top performers at your “cost centers” involved in the conversation. How can they see ways that their work can improve customer retention and even begin bringing in some revenue through upselling? Better yet, these team members usually know the most about what customers are considering leaving for a competitor, who would be good use cases for referrals, and more. These teams are usually untapped in their knowledge and can be big allies for you as you work on getting more sustainable. Pay close attention to the other sections about hiring and salaries.

Hiring

People are one of your biggest assets and biggest expenses. Between payroll, benefits, and a whole host of other costs, it’s a big line item. So why shouldn’t this be the first place to cut from?

First thing to remember: not all hiring is net new headcount. Aka: to fill a role that hasn’t existed before. Many hiring activities stem from backfilling because of employee turnover. A gut reaction of a “hiring freeze” is misguided. The teams that need to backfill roles are expected to produce at their current level, despite being down any number of team members.

The other problem with an all out hiring freeze: assuming you can “do more with less.” I’ve never met a startup team that wasn’t already pushing the boundaries of productivity and performance with their limited headcount. For these teams, status quo is: everyone’s overworked, pushing hard to meet deadlines, and doing more than any individual should. Without even being asked to “do more,” these employees are on a fast track for burnout, feeling unappreciated, and expecting bonuses or promotions. When they are asked to do even more, it’s really easy for your teams to start looking elsewhere.

Employee Turnover costs can be $5000 or more per employee - with recruiting and onboarding costs. Another organization puts this cost at closer to 33% of an employee’s annual salary! Costs of replacing workers rises FAST.

Deliberate Leaders: Take a deeper interest in hiring. What’s behind the numbers? Where will each role impact your entire operations and company? Don’t sacrifice on roles that would impact your customers - like Customer Service, Customer Success, etc. Double check what open requisitions are from backfills due to turnover. These teams are likely hurting the most, and need those extra hands, or you’ll lose even more from those same teams after being overworked. Take a hard look at productivity and performance numbers and get the real story behind what teams would need to produce more with less. There could be coaching or training opportunities to improve each individual’s performance, or opportunities to remove non-essential work until another time. Before a “do more with less” strategy, get more team members involved in idea generation and innovation.

Salary / Promotion / Bonuses

Many of my clients (and former employers) have quickly gone to reducing bonuses, extending promotion timelines, and avoiding equitable pay reviews, as part of their cost cutting.

Keeping your current employees happy is one of the biggest cost savings. Alienate them, and they’ll start to look elsewhere and get apathetic along the way.

Like it or not, a big way employees perceive their value is through their salary, title, and bonuses. When cuts are made to existing employees salaries, promotions, and bonuses: it hurts.

Apathetic employees can turn into actively disengaged employees quickly. “Disengaged employees in the US cost their employers $450 to $500 billion each year.”

Deliberate Leaders: Remember that when you mess with someone’s pay, they can quickly get into an emotional, reactionary state. Be thoughtful when reviewing salary increases, pay equity initiatives, promotions and bonuses.

Where did your mind immediately consider cost cutting?

As you think about keeping your company alive during economic downturn times, think deliberately about the ripple effects of any cost cutting you might do.

It’s never fun as a leader to be forced to cut costs. It’s emotional for you as you know this will impact others lives and you’re worried about your company’s future. Our habitual response when in fear is to try to make the problem “go away” as fast as possible.

Ask yourself whether your gut instinct is to make the fastest solution. Could you make a better decision for the good of your people and company?

Your people are paid to innovate. They are your best, on the ground resource for ideas. They know where there’s opportunity and would be glad to help the company out to help preserve their jobs and longevity of your company.