Recession Cost-Cutting No-Nos

Resist the temptation to make these bad business decisions during the downturn.

By Jennifer Wang   |   December 15, 2008

In a sluggish economy, running leaner is a must, but not every money-saving measure is a good one. These experts discuss the moves you shouldn't make during tough times, even if they seem like easy ways to cut costs.

Finances

Having started his own business during the 2001 economic recession, Virgin Money USA CEO Asheesh Advani knows how to trim expenditures to keep a company afloat through a downturn.

"The natural thing for business owners to ask is, 'Do you cut marketing, overhead or staff?' I think the right answer is to do a little bit of all three, but to be very careful on cutting what actually protects you on the downside," he says, noting that cost savings should never come at the expense of the ability to execute a long-term vision.

As for startup financing, don't bother with venture capital. "It's not the right market to attempt this," Advani says. "Rely instead on family, friends and angel investors as your main sources of capital, and go to many people for smaller amounts of money. It's very much about finding investors who are patient and supportive, and usually people who have invested a small amount rather than a large amount will be willing to wait longer for repayment."

Human Resources

Penny Morey, founder of human resources consulting firm RemarkAbleHR, believes that the biggest errors in judgment relate to poor communication on management's part.

"Instead of [employees] focusing on what they're supposed to be doing and helping the company to succeed . . . they tend to be looking for jobs, panicking and spending their time talking to each other about the bad news in the economy," she says.

Morey suggests regular meetings with employees--weekly if possible. And certainly if the work force has been reduced, management should sit down with those left behind and acknowledge the changes.

"It's not easy, but you can still boost morale," Morey says. "To me, people can be on your side or feel excluded, and most people want to be part of the solution if given the chance."

Forthright communication is also the best method of damage control. If salary and benefits are being decreased, Morey advises putting together a strategy to convey the decision-making process.

"If management is taking a salary cut along with everyone else, communicate it. People just want to know they're being treated fairly."

Putting together a benefits statement is another way to emphasize positive thinking. "Include a summary of vacation, paid time off, insurance--show what the company is still doing to take the focus off what's being taken away."

It's important to think long-term, Morey says. Performance evaluations, even if no longer tied to monetary incentives, still need to be done.

"You need to make sure people are still setting goals and working toward them, and employees will want to know how they're doing and what's expected of them going forward."

Technology

Business owners with websites shouldn't cut corners on things that relate to quality of service, says Todd Thibodeaux, president and CEO of the Computing Technology Industry Association.

"Don't downgrade from T1 to DSL," he says. "Make sure you're maintaining the security of customers' data, and keep your infrastructure in place. Don't hold off on buying a better piece of equipment."

A better strategy is to actually examine service offerings that will help small-business owners eliminate the need to invest in their own IT tools. "Companies can offload obligation to maintain equipment and software through managed services and bring stability to their bottom lines," he says.

According to Thibodeux, it's also an opportunity for businesses to reposition themselves for the anticipated green technology revolution.

"It's a good time to see how you can increase energy efficiency and look for better sustainable technology."

Marketing

"Mistake No. 1 is thinking that marketing is the best place to cut when businesses are looking to tighten their belts," says Ann Handley, chief content officer at MarketingProfs. "But it's not the time to jettison marketing. If business is slow and you're reining in your plan to get your name out there, it means fewer leads, less business and, ultimately, less income."

In fact, increasing the frequency of communications with customers can boost revenue and stimulate demand for your offerings, especially if competitors are busy slashing prices instead of promoting the quality of their services. Marketing can also encourage customers to make purchases.

"If you sell washing machines, for example, and people don't want to buy new models, you can stress how much they'll save on maintenance and electricity with a more energy-efficient model," she says.
In addition, Handley cautions business owners against taking on marketing responsibilities themselves.

"For an entrepreneur, what you contribute first and foremost is your vision and leadership, and if you get mired in taking over someone else's job, you'll probably be less effective as a leader."

To Handley, the most important thing is to think past the immediate pain and position for the post-recession period. "The economy will go up and down, but now is a good time to be an industry leader, just like it is in every kind of environment."