never fails As soon as the economy takes a downturn and annual revenue projections are lowered, the first place, after lowering headcount projections, companies look to reduce operating costs is employee development initiatives. I can’t tell you how often during my 20+ years in leadership I’ve been challenged by executive leaders to reduce employee training and development dollars for my department or division. And every time I’m given such an extravagant request, I brace myself for battle.
Do you need to reduce your operating costs? Increase spending on employee development!
Don’t get me wrong, I don’t like confrontation! In fact, on most topics, I prefer to look for compromising alternatives. But I strongly believe in the value of continuous employee education and development. So when it comes to reducing the costs needed for development initiatives, my strong convictions usually make me seek out the latest advancements in corporate battle gear. So, let the jousting begin!
In a desperate search to reduce operating costs, top executives are looking for ways to reduce personnel expenses. If you don’t reduce the number of employees, significantly reduce your current rate of growth. Of course, top executives point to other budget categories, but staff generally have the most influence on a company’s operating expenses, particularly in large, production-oriented businesses.
But, this is where friction occurs most often. Unlike top executives, middle managers are constantly pushing for additional resources. They never seem to have enough employees to meet the demands of the business. Therefore, your motivation is to maintain current staffing levels, while justifying the need for additional resources. As a result, requests for downsizing are often met with resistance from middle management. Therefore, to avoid downsizing, managers often sacrifice budgeted money allocated to other areas, particularly employee development. When that happens, the entire business suffers!
An investment of $80,000 generated a return of $200,000!
The vice president of the department asked Lauren, a contact center manager for a growing manufacturing company, to lower her expense forecast for the next budget year. Its vice president explained: “Although we continue to achieve significant growth, our average sales have declined slightly for the third consecutive quarter. This is primarily due to fluctuating trends in consumer purchases. So, to ensure we meet our earnings projections for next year, our combined operating budget needs to be reduced by $1 million, so I’m looking for $100,000 of that to come from your contact center budget.” Without hesitation, Lauren’s VP said, “I see you forecast $80K in employee development initiatives. Reduce that and you’ll only have to reduce your staffing projection by one full-time employee (FTE) to hit the target.”
It seems so simple, right? Wrong! And here’s why!
Like most department leaders, Lauren was asked to further cut her budget forecast, which she already considered aggressively tight. Realizing that she was on the hook for $100,000 in cuts and her employee development money was at risk, Lauren had to get creative!
Lauren realized the value of providing continuous development to her employees. She had seen favorable results in the past, particularly with members of her leadership team. But now, she was faced with a difficult dilemma. She cuts her headcount forecast by three FTEs (equivalent to $120K) or postpones her employee development initiatives by a full year. With the exception of staff, which contributed the bulk of its annual operating expenses, the $80K allocated for employee development stood out as a tall, ugly weed begging to be cut down by the VP of Financial Slingshot. she. And there was no doubt that her VP was ready to swing!
After extensive thought and planning, Lauren submitted her revised budget. Lauren’s VP called after reviewing the reviews and said, “I’ve noticed you’ve cut your headcount growth projection by five FTEs, but you’ve kept your employee development allocation of $80,000. How do you propose to handle business growth?” of the next year?” Lauren responded, “My $80,000 allocation will be used to create and implement two employee development programs, one designed to improve process efficiencies and the other to improve quality. The efficiencies my department will gain after completing our new Training programs for process improvement will allow us to increase productivity by 10%, equivalent to the production of two employees.” Lauren went on to say, “In addition, our new quality control program will allow us to reduce product entry errors. data and rework by 15%, which is equivalent to three more employees.
The economy of continuous improvement!
Lauren’s $80,000 investment in employee development programs resulted in total efficiency gains equal to five FTEs. With an average annual salary of $40,000 per employee, Lauren’s programs generated $200,000 in cost savings (5 FTE x $40,000). but it also reduced Lauren’s annual employee growth rate by five FTEs. In other words, it absorbed new business growth without adding additional employees. Most importantly, the new programs had an extremely positive impact on customer satisfaction and quality assurance ratings.
Too often, knee-jerk decisions to reduce operating expenses by delaying or eliminating employee development and incentive programs are met with substantial increases in customer dissatisfaction, decreases in product and service quality, as well as trends decrease in employee satisfaction and productivity. All of which results in higher operating costs and lower profits.
Unfortunately, many companies do a poor job of anticipating these additional costs, and they do an even worse job of measuring them. Often the true risk of your financial impact is overlooked during the budget planning and approval stages. But one thing is for sure; the negative impact eventually shows up in the bottom line.
For companies to truly realize their full profit potential, they need to stop viewing their employees as negotiable financial control devices and start viewing them for the valuable resources that they are. When properly trained, led, and inspired, employees have the potential to save companies far more than they actually cost them. Combine an effective strategic plan with modest investments in employee development and technology, and you’ll find healthy companies that make sustainable gains in customer satisfaction and retention, as well as profitability.
Businesses must focus on continuous improvement to survive in today’s competitive marketplace. If companies control the costs associated with the successful delivery of products and services by seeking constant improvements, they can be both competitive and profitable. As Abe WalkingBear Sanchez states, “A business manager who doesn’t focus on improvement becomes an administrator at best and a bureaucrat at worst.”
“What Senior Business Executives Don’t Know and How It Can Hurt Your Business!”
Therefore, as the current economic climate continues to resonate with consumers, businesses will need to become even more efficient, financially savvy, and customer-focused to:
o Increase new sales
o Increase repeat sales
o Improve cash flow
o Increase customer pleasure and customer retention levels
o Reduce the cost of doing business (for themselves and their customers)
Let’s face it… there are lots of creative ways companies can make a profit. They may scam employees out of their retirement plan or not fully fund the plan…sound familiar? They can also make a profit by defrauding customers and suppliers… Can you think of a company?
If you are a business executive or business owner (or aspiring to be) and are serious about increasing your profitability, I encourage you to read our FREE 20-page Special Report entitled, “What the Best Business Executives they don’t know and how it can harm their business”. This report will help you significantly improve the key areas of your business, which leads to increased profitability.
