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Corporate Cost Cutting
By Bruce Mushial

     Many companies are engaged in lay offs and other cost cutting measures but is this going to help or hurt investors long-term? Certainly if the revenue isn't there a company has to manage their expenses to control what occurs on the bottom line. The outcome of some cost cutting measures can be short sighted. Near-term improvements at the bottom line can lead to long-term disaster. The traditional style of American management is to focus on the current quarter, often at the expense of what will maximize shareholder equity and the ongoing growth of the company. A handful of years ago IBM decided to cut costs by offering a "golden handshake" early retirement offer to many of its managers. Unfortunately a larger than expected number of eligible managers took advantage of the plan, causing gaps in management at many facilities. The only way to fill the gaps was to offer remaining managers financial incentives to uproot their lives and move to another location. The financial incentives and the cost of relocating the employees significantly reduced the cost savings anticipated from the original cost cutting program, and in the process they lost the expertise of many of their top managers who retired early. Corning Corporation in recent years undertook some cost cutting by selling off their cookware and medical instruments divisions to better be able to focus on their fiber optic business. That was fine and well until the market for fiber optic products became the victim of rampant over capacity by too many companies jumping into the sector. Right now company management probably wishes they had revenue coming in from the current home cooking boom and the proliferation of portable defibrillators appearing in nearly every emergency vehicle and most every private and public building where there are more than a couple of hundred people.

     Laying off employees can lead to an uneasy atmosphere at a company and can divert a large amount of creative energy to worry. Often times good employees with unique skills go out the door with other employees. When the economy picks up those employees aren't likely to be available for rehire. Some companies are cutting back on their research and development expense, which could leave them less able to be competitive in the future. Restructuring a company's divisions can lead to ongoing chaos and new inefficiencies. A restructuring can also lead to a public relations nightmare. Gateway Computer just announced they would be closing two of the company's customer service centers. Instead of gaining the applause of investors the focus shifted to the question of how bad customer service might become after these two customer service centers were closed. Verizon on the other hand, instead of announcing massive lay offs has simply stopped hiring, figuring their headcount would decline adequately through normal attrition and the shifting of some job functions from one department to another. Some individuals with eating disorders can lose so much weight that they start reducing the mass of the heart muscle and other vital orders. In the same way some companies may cut their head count and facilities so far that when the economy picks up or an opportunities comes along that could substantially benefit shareholders that they won't be able to capitalize on the opportunity in a timely manner. As investors we need to watch the bottom line but we also need to be careful that the companies we hold shares in don't enact cost cutting measures that will leave the company weaker in the long term.

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