Reducing business costs: How to cut without ruining morale

In his book For Profit, the law professor William Magnuson sketches a surprising history of the corporation. Throughout history, he shows that corporations were purpose-built to solve societal problems or tackle grand projects.

Corporations built Ancient Rome’s roads and aqueducts, helped the arts flourish during the Renaissance and facilitated the blossoming of the 20th-century middle class.

Things are different now. In many ways better – but, in some ways, not so much. Enterprise is more dynamic and more open to everyone. And the ways companies serve consumers are more diverse and specialised.

But perhaps, as Magnuson’s book illustrates, a more cooperative or social bent to commerce has somewhat diminished. Companies used to have a much more acute appreciation of society (both society at large and the society in miniature that exists in the company’s workforce).

Cuts and worker morale

We only need to look around us to get a barometer reading on worker morale. The UK is gearing up for its largest strike wave in three decades. General morale is dipping (particularly in sectors like care).

Household consumption is set to shrink by 2.3% in 2023. Business investment is set to contract by 3%. Even small creature comforts like Netflix are being eschewed. The streaming giant will shed 700,000 UK users over the next two years, analysts predict.

These are tough economic times. Cuts are a fact of life. Spending needs to be reined in, costs cut. And, perhaps most unfortunately, workers may lose their jobs. It’s easy for these cuts and changes to be adversarial. But that needn’t be inevitable.

Of course, you can’t please everyone when reducing business costs. There are no cost-cutting options available that don’t bring some collateral damage. And the impacts last: A Dutch longitudinal study of employee morale post-cuts, found reduced job satisfaction and less loyalty toward the organisation for at least two years after the cost-cutting event.

Reducing business costs (while minimising damage to morale)

There is no easy option when reducing business costs – but some are better than others. Let’s look at some choices available to company leaders.

Reduce executive compensation:

‘We’re all in this together’ is a common sentiment during an economic downturn. And employees often greet it with suspicion. To paraphrase Animal Farm, it seems that some are more ‘in this’ than others.

That’s why reducing executive compensation (and being open about it) is a powerful tool. By how much? Well, that’s an open question. But certainly enough to signal to employees that management is feeling the same pain. Especially in the case of layoffs.

Reduce expenses:

You need to look at expenses. And not just the costs – but also how you’re managing them. If your expense management system is rudimental and doesn’t allow granular analysis of costs, then investing in a new system is step one.

‘Investing’ doesn’t have to mean a high cost. Many expense management solutions are now in the cloud. Implementation is quick and it’s based on a monthly subscription.

The old saying in business that you have to ‘spend money to make money’ is also true with saving. Sometimes you have to spend money to save it. An expense management solution will make minimising T&E much simpler and also more humane.

When cutting costs, be very wary of items that are high-value but low-cost. Sure, getting in cheaper coffee might save a few pennies – but is that really what’s weighing down the company’s finances? Apply a weighting to these sorts of costs. The harm to morale could outweigh any money saved.

And don’t be afraid to open the floor when it comes to cuts. Get what’s known as functional leaders involved. These are people who aren’t necessarily formal management, but widely respected for their work and influence. Their buy-in when cutting costs is invaluable.

Manage out poor performers:

This should be standard operating procedure, even during easier economic times. Accelerate this process during a downturn. Especially when cuts must be made.

Psychologically, employees will view this as different to workforce cuts. A job loss tied to performance is different to an across-the-board downsizing. It can be a powerful shield for employee morale.

Pushing through the downturn

The downturn is temporary. At some point, it will abate and you can loosen your grip on costs and investment. For now, though, a defensive mindset is what’s needed.

No one is enthusiastic about cuts. But damage to morale can be managed. By making cuts more strategic, you can lower your costs and improve resilience without harming worker (or, indeed, your own) morale.