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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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