Academic journal article The Public Manager

Cost Cutting: Part II (except There Is No Part II!)

Academic journal article The Public Manager

Cost Cutting: Part II (except There Is No Part II!)

Article excerpt

Retrenchment doesn't fundamentally transform a company's cost structure; it simply establishes a new, lower equilibrium between revenues and expenses. It doesn't create competitive advantage--not unless you're taking out costs a lot faster than your competitors and doing so in a way that doesn't imperil long-term success. In other words, retrenchment can buy you time, but it can't buy you a future. At some point, in fact, it becomes retreat.

So argue Gary Hamel and Erick Schonfeld in this April's issue of Business 2.0 in an article entitled "Why it's time to take a risk." While this advice defies conventional wisdom regarding budget cutting, the article is about more than economic recovery strategies. Hamel and Schoenfeld confirm what many innovation advocates have been arguing throughout the decade--that cost cutting or retrenchment is not a forward-thinking strategy. Two separate studies--one by Mercer Management and another by Strategos (Hamel's consulting firm)--show that cost cutting resulted in the companies either significantly falling behind competitors or having their rates of growth collapse within three to five years.

For public managers, agreeing with Hamel and Schonfeld's main point: that "retrenchment makes you smaller, not better," will be easy. How to not start the slide down the slope of cutback management will be harder. To begin with, after a decade of talk in the public sector about developing activity-based costing so that public managers can understand what it really costs to produce and provide government services, little progress has been made. …

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