9 Things Companies Do to Save Money – That Actually Cost Money

April 3, 2017

These moves seem like they'd save business's money, but in reality they cost them a lot of money.

The main function of any businesses is to make money. Businesses that make money can serve their customers and advance their cause (hopefully it’s a good one), whereas businesses that lose money aren’t businesses for much longer.

Hence, businesses need to be worried about the bottom line. They need to ensure they are set up for long-term financial growth, and that means not just increasing sales, but also controlling expenses.

That being said, far too often businesses cut expenses in an effort to save money. And, ironically enough, those moves wind up costing them a lot of money in the long run.

So, yes, sometimes cutting expenses is the right move and sometimes it’s downright necessary. But, here are nine common things businesses do to save money, which actually wind up costing them much more money in the long run.

1. Cutting salaries and/or benefits, either to existing employees or new employees.

Salaries and benefits are often a company’s largest expense. So what better way to save money than to cut them?

Well, not so fast. No employee is going to happily accept a reduction in salaries or benefits. Which is why few companies take this approach with their existing employees.

Instead, many companies begin offering lower salaries or worse benefit packages to new employees. That’s an equally bad idea.

Think about it: if you are trying to save money, it means your talent isn’t performing where you want them to. If you cut salaries for new employees, it’ll mean you'll attract a lower level of talent going forward (generally). So, if your current people aren’t getting the job done, why would a slightly less in-demand talent base be able to get the job done?

So what’s the solution? Companies can do two things. First off, perhaps changing the salary structures for new employees and linking it more to performance. By doing that, employees could potentially make more, if they excel in their role.

Or, it’s time to take a hard look at how your existing talent is being deployed. Are your people not performing up to expectations, or are you not putting them in a position to succeed? If that’s the case, hiring more people – regardless of the price – will only exasperate the problem.

Bottom line, cutting salaries will only lead to worse talent. Unless you plan on changing strategies, how will a smaller talent pool help you better achieve your business goals?

2. Creating an inordinate amount of processes to save money.

One person at your company puts $4,000 on the company credit card for drinks at the local bar. Rather than discipline that person, the company overreacts and creates a burdensome expense policy for all.

And people groan, because 99 percent of them were responsible with their expenses.

Or another person hires a subcontractor that doesn’t work out. Rather than finding the root cause of the problem and dealing with it one-off, you create another burdensome policy on hiring subcontractors that requires employees to hire the lowest bidder, unless there’s a compelling reason not to.

And quality suffers.

It happens time and time again. A few employees do something wrong. Rather than deal with that problem as a one-off, the company overreacts and instills burdensome policies that assumes guilt, until proven innocent.

While these controls are often put in to save money, what they really do is discourage creativity, disengage employees and cost a lot of money to enforce. While a company needs a few well-defined policies, having too many destroys your culture and requires entirely too many resources to maintain.

3. Hiring a high-priced star to fix an otherwise underperforming team.

A team is underperforming, so a company will spend money on a high-priced star to turn that team around. While this doesn’t sound like a cost-saving measure, it really is: it’s just the fastest, laziest way to attempt to fix the problem.

And it doesn’t work. An in-depth study by the Harvard Business Review found bringing in high-priced stars to fix underperforming teams actually winds up costing a lot of money in the long run.

Instead, the only way to truly fix an underperforming team or an underperforming organization is to fix its fundamental systems, i.e. the way it hires and develops its people or its strategy. Those are more in-depth, expensive processes; but they are the only way to turn things around.

4. Indiscriminate layoffs

Layoffs are never good. They destroy morale, weaken the company and signal to the market something isn’t working.

Yet sometimes they are necessary. But a company should never lay off people indiscriminately.

What does that mean?

It means laying off everyone in a department or everyone at a certain pay rate or level, regardless of performance. It’s the ultimate hatchet move, cutting off an appendage of your company with one fell swoop.

That’s dumb. There are often top performers within that group you’ve spent money on already recruiting and retaining. Do your best to identify and reassign them to other roles.

Granted, being more precise will take more time. But that time will pay off, as losing top performers is never a winning business strategy.

5. Not investing in high performers.

High performers are performing well! Everything is great! Why would you possibly need to invest in them?

Here’s the reality: high performers are the people that will push your organization to new heights, the future leaders of your organization. Conversely, they also tend to attract a lot of attention from fellow companies, and have big ambitions to do great things.

If you don’t challenge them, if you don’t pay them what they’re worth and if you don’t find out what they want to work on, they are going to get frustrated, fast. And it isn’t particularly difficult for a highly talented employee to get a great job elsewhere.

So pay them, promote them when they are deserving and allow them to move laterally within your organization, so they can master new skills. High performers have exponential impact, and you want to ensure that impact is at your company – not a competitor's.

6. Not investing in low performers.

Here’s the other side of the coin. Whereas high performers will have a massive impact on your organization’s success, low performers will likely have very little. Wouldn’t it just be easier to get rid of them?

Well, maybe. People will accept a fellow employee getting fired if they are given a chance to improve. But just firing them without that chance will destroy morale and cause others to leave as well.

Beyond that, you don’t want to be firing people at all. It’s expensive to recruit and train a new person and it usually has a negative effect culturally.

So, work with your low performers, provide coaching and training to help them improve. Encourage a lateral movement to a position that might better fit their strengths. It's okay and necessary to let people go if nothing clicks, but that should be a last resort. 

Tying the last two points together, Google’s former Head People Officer Laszlo Bock stressed the importance of focusing on “the two tails.” That means focusing on high-performing and low-performing employees, as that will have the most impact on your organization as a whole.

So, yes, there is an expense to investing in both groups. But there’s also a tremendous gain to be had as well.

7. Not investing in managers.

Research shows bosses have a huge amount of influence over the effectiveness, engagement and happiness of their direct reports. It’s mostly accurate to say a company is only as strong as it’s managers.

So manager training or executive coaching might seem like obvious things to cut from the budget. Additionally, surveying your employees semi-regularly on the effectiveness of their managers again has real costs associated with it, and can be tempting to cut.

But all of those costs pale in comparison to the cost of not doing those things. Because even good managers need help, and bad managers need to be identified quickly and reassigned. If those things don’t happen, retention will spike, productivity will dip and revenues will suffer.

8. Buying cheap tools or refusing to buy needed tools.

So you saved 12 percent by buying discount computers. Or you don’t want to buy a few Photoshop licenses. Or you get your IT tools off the clearance rack.

All of this saves a few dollars upfront, sure. But it makes your people less productive, which is far more expensive in the long run.

That’s not to say a higher price always means higher quality, but get the tools your people need. And get an office that fits your brand too, your workspace itself is one of your biggest recruiting tools. Again, these all have costs associated with them, but those costs pale in comparison to the negatives of not having them.

9. Not investing in employee engagement activities.

Gallup has found that disengaged employees cost American employers alone $500 billion+ a year. That’s a huge expense.

Hence, it’s critical to invest in employee engagement activities as a company. This can be anything from giving employees time to work on ideas they are passionate about to investing in learning.

All of these programs have cost associated with them. But all of them have benefits associated with them as well, as the more engaged your workforce is, the higher your revenues. So while you don't need to have weekly happy hours or dog therapists on staff, spending no money on activities like these is a classic case of penny-wise, pound-foolish.

The takeaway

The bigger point here is that, as Isaac Newton said, every action has an equal reaction. While some of these moves may save money on expenses, they also cost money on revenues.

So it isn’t that companies can never fire an employee, cut a perk or scale back a program. It’s being aware of the cost of those cuts and how it might affect performance long-term. And there a few things an organization often do – such as any of the nine actions listed – where the long-term expense drastically outweighs the short-term benefit.

Credit: Tax Credits, Flickr

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