Downsizing Wave Rolls Forward at US Firms
Experts warn that refashioning companies requires more than chopping head counts
IN an effort to cut expenses, Citibank told its employees recently to forget about using cover sheets on faxes. W. R. Grace & Co. decided it could save $250,000 a year by eliminating the slick quarterly report normally mailed to shareholders. And, as part of the cuts recommended by a committee trying to save $1 million, retailer Laura Ashley eliminated paper coffee cups and gave its employees reusable glass mugs costing only $2 apiece.
America is becoming a nation of cost cutters as an increasing number of companies look at expenses as an opportunity.
Take Citibank, the nation's largest bank. In 1991, the bank set up a series of task forces to look at the bank's expense ledger. The groups came up with suggestions ranging from merging back offices to asking employees to pay for the potted plants. By implementing some of these ideas, the bank has reduced its expense base by $1.3 billion.
Although much of the decrease came from reducing its employee head count from 95,000 to 81,000, a portion of the cuts came from expenses which had become a fixture of corporate overhead.
Take the potted plants. ``There are certain places that look like hothouses - it has become an obsession with some people,'' says Jack Morris, a spokesman for the bank. Thus, the bank began pruning this expense: Some branch offices asked employees to buy the plants (the bank gave the money to charity) and take care of them themselves. At Citibank's Sydney, Australia, branch, where the plants were leased, the bank decided that only those in public areas could stay. The rest of the plants, saving $3 (Australian; US$2) per month per plant, were returned to a landscaping company.
The cost cutting has even extended to Wall Street, where limousines once were gridlocked outside trendy restaurants. Today, many of these restaurants are out of business and the limousines are in the garages. ``The attitude used to be, `Hey, we made some money, let's have a party. Today, it's all business,'' says James Flynn, a spokesman for Dean Witter Discover.
Shareholders seem to be applauding the money-saving concept. After W. R. Grace stopped sending out its quarterly report, ``We waited for the shoe to fall,'' says spokesman Fred Bona. Instead, the company received one letter about the cutback - and it was in favor of the change. Grace now stuffs a quarterly results flyer in with the dividend checks.
By far the most visible reflection of the cost-cutting mania is the layoffs that are taking place in offices around the country. ``It's hard to find a day in the paper when some company is not slashing 1,500 or 3,000 jobs,'' says David Dannenbring, chairman of the management department at Baruch College in New York.
Almost half of all major United States companies downsized between July 1992 and June 1993, according to a survey by the American Management Association (AMA) of 890 of its members. The companies eliminated 10.4 percent of their work force during this time. The AMA says work-force cuts are likely to continue at the same pace over the next 12 months.
Labor typically represents about 60 to 75 percent of a company's costs. Managers hope that by consolidating divisions, reducing bureaucracies, and eliminating money-losing factories, they can reduce their unit labor cost.
These savings are often short-term, however. ``It's our experience that in the following 18 months, about 75 percent of the cost is back in the system,'' says Gerry Thomas, a vice president at Towers Perrin, a consulting firm. Companies frequently hire back laid-off employees as consultants or contract workers. They pay overtime to get the same amount of work done. ``If you only focus on the head count, you usually overlook the other one-third of your costs,'' Mr. Thomas says.
If belt-tightening is to take place, Towers Perrin usually recommends that senior management set the example. ``In times of crisis, you need to cut out the airplane, limousine fleet, and hunting lodge for the executive group,'' Thomas explains.
But getting senior managers to share the pain is sometimes more difficult. ``The perks end up difficult to eliminate unless there is a gun to the head,'' says Wayne Waldera, a Minneapolis-based specialist in crisis management. Even the gun sometimes is not enough. Mr. Waldera recently was asked to look at a privately held company which had two yachts and a private island. ``We suggested the owners convert them to cash, but they wouldn't do it,'' he recounts.
Still, many companies are streamlining the expense side of their budgets. Chicago-based accounting firm Arthur Andersen & Co. found that travel was one of its major costs. The company decided it was cheaper to use one travel agent for all of its 120 domestic offices. Once it centralized travel, it could analyze which airlines its employees flew the most and use that buying power to negotiate lower fares.
Some firms are taking that concept further. Citibank has not only a preferred airline but also a preferred hotel. Employees need special permission to use a nonpreferred carrier or hotel.
Taking stock sometimes has been an eye-opener for firms. Towers Perrin visited a firm with a large number of copying machines. The consultants called up a copier company and asked how many machines a company of that size should have and was told it was half the amount. Towers Perrin then found that the company was making 10,000 copies per employee per year. ``It turned out two people at the company were running their own copying business,'' Thomas says.
Some firms have expressed amazement at the amount of fat they could squeeze out. Atlanta-based Georgia-Pacific Corporation formed 200 task forces to try to find annual operating cost savings of $80 million. The exercise resulted in two to three times the goal, says spokeswoman Sheila Weidman-Farley.
But some consultants are telling clients that they have gone too far. ``This constant round of cutting can only go so far and then the company suffers,'' says Bob Hiebler, a partner at Arthur Andersen. ``They have cut out the people and not changed the process - that won't work.''