Spending Cuts - Is that really the solution?
Dr Pietro Micheli
In a period of recession and economic crisis, the keyword for both public and private sector organizations is cuts. Currently, spending cuts are regarded as the best and almost only way to ensure economic sustainability. But is that really the solution?
Although it is clear that cuts in spending have to be made, I believe that two fundamental questions have to be addressed:
- where cuts will take place.
- how cuts will be made.
The first question refers to which functions will be reduced. Clearly, if physical and human resources are reduced, some organizational functions will be affected and this will have an impact on products and services. The second question refers to which timeframe and according to which criteria savings will be made. The key point therefore is: are cuts across the board painful but inevitable, or is there a better way?
In this short paper I look at what not to do in a period of crisis such as the one we are currently experiencing. Then, I examine key issues tied to performance management and continuous improvement. I conclude with my remarks on how performance management could help organizations survive and be economically sustainable over time.
After making substantial investments in the design and implementation of performance measurement systems, when a crisis comes, organizations tend to reduce the resources employed to support and use these systems. Moreover, organizations change the very ways in which performance measurement systems are utilized. Both reactions, although understandable, are usually unfruitful and sometimes utterly destructive, for a number of reasons:
- they suggest that performance management is not ‘core business’ - if we have to cut cost, let’s get rid of some expensive frills first.
- Performance management is reduced to a narrow version of performance measurement, i.e., we forget about the links between strategy and action, and focus on a limit set of measures with the aim of monitoring performance more closely.
- 3- In business, increased emphasis is applied on financial measures (vs. non-financial ones), whereas public sector organizations concentrate even more on statutory indicators (vs. local ones). The main reason for this shift in emphasis is that we must monitor and control performance. Although the need to feel in control is absolutely human, there is consistent evidence that suggests the opposite of what typically happens, i.e. pay greater attention to non-financial and local indicators as they are more informative, and use performance measurement for improvement, rather than control purposes.
Research we conducted at the Centre for Business Performance shows that organizations introduce performance measurement systems for several reasons, including: implementing strategy, supporting decision-making processes, aligning behaviours, allocating resources, complying with rules and regulations, and providing internal and external accountability. Also, performance information can assist organizations in re-assessing their competitive position, as well as their value propositions and strategies. Indeed, performance measurement and management should be understood as a useful approach that can (and indeed does) fulfil multiple roles. Even more, performance measurement systems can:
- facilitate learning and improvement across an organization
- provide line of sight to employees (also through the use of performance targets)
- ensure more effective communication to stakeholders
- drive both the formulation and implementation of strategy, considering not only short-term trends, but also medium/long term ones through the use of scenario-based strategy maps
- foster a culture of performance, coupled with the philosophy, tools and techniques of continuous improvement and organizational learning.
Continuous improvement is another relevant perspective to avoid indiscriminate cuts in spending, and, at the same time, identify ways in which organizations can save money by being more efficient and effective. Decades of research in this area demonstrate that, through a continuous improvement approach, we can:
- determine what ‘value’ means to your stakeholders
- allocate resources more effectively
- provide better services and products, therefore managing to charge higher prices
- reduce ‘failure demand’, i.e., unnecessary work that is undertaken because we are not able to fix problems when they have begun.
During a crisis, organizations are required to cut spending and be more efficient. But where and how should cuts be made?
Building on our work at Cranfield’s Centre for Business Performance, I suggest the following:
- avoid knee-jerk reactions – the organization must survive the crisis, but it should also be sustainable in the longer run;
- don’t make indiscriminate cuts – start by asking yourself which functions should be reduced and over which timeframe, depending on your organization’s competitive position and strategy;
- don’t use performance measurement systems for control and monitoring purposes – they are much more useful and powerful if used as links between strategy and action;
- use a continuous improvement approach to better manage people and processes.
Finally, after running events and roundtables at Cranfield over the past six years, I have learnt that, especially in critical times, managers can greatly benefit by talking to their peers. Therefore, avoid isolated reactions; rather, share your experience with other managers and seek for advice.
Dr Pietro Micheli is Lecturer in Organizational Performance, Director of Cranfield’s Public Sector Performance Roundtable, and Director of the Open Programme in Operational Performance Management – firstname.lastname@example.org.
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