Enduring Financial Change in a Declining Economy

Michael A. Hartmann

Enduring Financial Change in a Declining Economy

Financial-decline
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Introduction

The harsh reality of an economic downturn is that companies must make decisions to perform budget cuts to compensate for diminishing revenues. Budget cuts can be comprised of a combination of sources. These include outsourcing, employee reductions, service reductions, employee benefit changes, organizational realignments, liquidation, or any resourceful techniques to decrease expenditures. Each decision carries its own incentives as well as consequences. Several of these decisions for reducing budget costs will be discussed.

Facing Budget Cuts

Overview

Economic cycles can significantly affect companies in how they handle their financial planning concerns. During prosperous times, managers appear to have an unconstrained budget that permits conglomerates to expand their products into additional markets or to offer more diverse services to customers. On the other hand, during slow economic times administrators are pressured into decreasing budgets in order to compensate for dwindling income levels. This is in response to ensure the survival of the company through these economic downturns without degrading the company’s core competencies. How managers act in response to financial stresses within the organization will result in significant outcomes that are dependent on their skillfulness (McGarahan, 2001).

Developing a Strategy

It is essential for management to develop a realistic strategy in advance to implementing any actions to reducing a budget. There are many directions for a manager to consider that would achieve their objective to trim down expenditures. Cutting costs is a business decision that should be based on well thought out plans that will minimize the impact on the organization. When a financial short fall is recognized, management without delay must amalgamate and answer certain fundamental questions (TechRepublic, 2003).

These questions can be comparable to the following:

  • What are the company’s long-term plans? Management can reiterate the current mission, goals, and appraise the existing capacity of the company. This incorporates a realistic assessment of what the company will be able to offer to customers in the future (TechRepublic, 2003).
  • How will the company position itself to be successful and profitable? In the changing climate of the industry, the company will have to find a balance between profitability and maintaining their position in the industry. Managers must calculate approximately how the financial recession will affect their entire industry. Furthermore, companies must determine if the monetary degeneration will influence them to take on a changed role in the industry (TechRepublic, 2003).
  • What are the preliminary plans for cost-cutting? This includes estimations on how much funding will be necessary to cut and what functions of the company can be afforded to be reduced or viable candidates for elimination (TechRepublic, 2003).

Subsequent to these preliminary inquiries are fulfilled, management must investigate into much greater detail what functions can be eliminated or receive reduced funding. This can be accomplished by generating a discrete priority list of the business functions that are genuinely business essential. In the same respect, a list of business functions that would be negatively impacted if reductions were made to its financial support can be constructed as well. This list includes all the opportunity costs that a cost cutting decision would incur and all of its successive consequences. These lists can assist in directing executives to make a decision on what functions of the company can be financially decreased or eliminated with a minimal impact to productivity (TechRepublic, 2003).

Organizations will find it necessary to recognize and return to their core competencies. This entails that the company begins to return to the basics of the company’s core mission. During flourishing economic times, companies have a tendency to investigate and expand into new services that may not provide added value to the company. A company may have lost its focus and have ventured out of the boundaries of its deep-seated core strengths. Functions that were previously attractive now may have developed into a hindrance to the potency of the company. All activities must be lined up with the strengths of the company. If these functions fail to meet requirements, they should be considered barriers to financial recovery (TechRepublic, 2003).

Outsourcing

An opportunity that companies can consider in order to reduce costs is to outsource certain activities. Outsourcing offers ways for companies to preserve functionality while saving on costs including labor expenditures. If a company already makes use of outsourcers, management may find it beneficial to evaluate their current contracts that are about to expire. Companies can take advantage of outsourcing companies that are also facing budget cutbacks that will aggressively compete for their business (TechRepublic, 2003).

Management must be aware of the advantages and disadvantages of outsourcing and decide if changing to outsourcing is best for the wellbeing of the company. Executives must effusively investigate the prospective service providers before making any commitments. Some contractors may not be able to deliver the cost savings that was anticipated. Some of the advantages of outsourcing include (ROK Connect Limited, 2003):

  • Permits a business to focus on core activities
  • Streamlines a business’ operations
  • Gives access to professional resources that might be their specialty
  • Shares the risk
  • Confidence that the process is in excellent hands
  • Removes the pressure in regards to continually developing new technologies
  • Improves service quality
  • Releases manpower to focus on other company functions
  • Liberates cash flow
  • Increases the control of the business
  • Enables the business to be more flexible to changes in the demand of the market

The disadvantages to outsourcing are as follows (ROK Connect Limited, 2003):

  • The fear of the service provider going out of business
  • A company may lose control of the process
  • Creates potential redundancies
  • Competitors may also be using the service provider. As a result in some cases, the best interests of the service provider may be weakened with other clients
  • A company may lose focus of the customer and give attention to the product, the outsourced process
  • The loss of talent generated within the company because of dependence on the outsourced company
  • Employees may react negatively to outsourcing and as a result their quality of work may suffer

Once management decides that outsourcing is the proper pathway to proceed, intense investigations of qualifying providers must be accomplished. They must discover the histories of the past and current clients of each prospect to gain references on their service quality. They must ensure that there are no hidden terms or costs associated with choosing them as a partner. Last but not least, they must make certain that the company has long term financial stability (ROK Connect Limited, 2003).

E-Learning and Employee Training

A frequent oversight performed by companies during budget constraints is to eliminate staff training. Training is crucial to growth of opportunities within the company. In lean times, training can help increase productivity and improve the overall morale of the company. While layoffs may be inevitable, the costs of replacing valuable staff is always much higher than retaining and training current staff. These core employees will help guide the company throughout hard economic times (Rueda, 2002).

Conventional employee training can be expensive and rather unattractive to management during budget restrictions. A trend in employee training that offers a low cost solution is E-Learning. E-Learning provides a cost effective opportunity for employees to become more efficient. Career education will enable employees to concentrate on their career paths and not on the financial predicament of the company. E-Learning can also assist in helping employees to become skilled at additional tasks that will be added to their duties during any restructuring that the company may have to endure. E-Learning is easily accessed by the employee and can turn them into a better performer to enhance the company’s overall effectiveness (Rueda, 2002).

Employee Downsizing

A manager my find themselves in the position where the downsizing of employees can not be avoided and becomes a causality of a reduced budget. Out of all the changes made to slash budgets, the downsizing of employees will have the most impact on the culture of the organization. Not only are the employees that are selected for layoffs affected by this change, survivors of the reductions may also have difficulty coping with this transformation. A company must carefully perform downsizing in a strategic fashion to limit any ramifications to the culture of the establishment (About, 2003a).

The objectives of downsizing employees are to increase productivity, quality, profitability, customer service and to reduce costs and wastes. The decision to layoff employees is not made lightly. However, once this assessment is made, managers must be conscious that their actions during this time can improve or erode the climate of the organization. If layoffs are instituted correctly, it can be possible to increase the chances that positive results can be achieved. There are simple but complex strategies that can be used to achieve these optimistic benchmarks (About, 2003a).

Some managers will withdraw from visibility throughout the layoff period. These managers may be planning for the future of the company or intentionally avoiding contact with employees’ altogether. The change that layoffs produce is a major event for a company to undergo. Management that does not make themselves visible to the survivors during these times will result in negative implications to the morale of the company (About, 2003a).

Layoff survivors need interaction with their supervisors on a daily basis. Leaders must be able to pay attention to employees that may express pain and sorrow. Leaders ought to appear strong and able to set the tone of the changes being undertaken to be positive to the company and to all the remaining employees. Employees should have confidence in their leaders or they may be suspicious of the intentions of management (About, 2003a).

In order to combat the negative impacts to company morale, climate and culture, management needs to reconstruct the work environment. Survivors must be able to have their self-esteem developed to find their work gratifying. Managers will discover that this is easier to accomplish if they keep the lines of communication open. For example, an executive can meet with employees and let them ask questions that they might have concerns with. Management can help the employees to visualize the new role and direction of the company. Company mission, vision and values can be reemphasized to keep employees focused on their responsibilities (About, 2003a).

Further attention can be given to each individual worker to enhance the success of changes due to employee reduction. Employees are keen on feeling secure and appreciated in the bounds of a company. A good supervisor will be capable to communicate the reasons why workers are valued to the company on a group basis as well as on an individual basis. Survivors ought to know their new individual responsibilities in the organization. Workers also will want to be aware of any new changes in the company that will affect their career path (About, 2003b).

Survivors also carefully watch how the company conducts the layoff process when employees are terminated. In order to maintain morale, survivors must see that the downsized employees are treated with dignity and respect. The practice of escorting people and their personal items out of the door using security officials or supervisors is not an effective way to make survivors feel affectionate about the organization. A more practical technique would be to conduct a meeting towards the end of the day when most of the workforce has left and divulge the dire news to the downsized workers. This would be followed up with a gesture by the supervisor to assist the individuals to gather their belongings. This may possibly present a less damaging impact to the culture of the company (About, 2003b).

Some companies also have found it successful to get in touch with the former employees several days after they depart the company in order to check up on them. This can soften any negative attitude that the laid off employees may carry against their former company. This would be especially beneficial if the ex-employee still maintains contact with current survivors of the company who may perhaps desire to discuss the experience on how the company deals with individuals during layoffs (About, 2003a).

A manager should be attentive of the fact that each employee may respond differently during change. Some employees may be able to accept and adjust to change easily. Others may have some difficulty when transformations occur. Generally people become better at accepting change with experience. However, it is wise not to downplay the potential reaction to change that an individual may bring to bear (About, 2003b).

Management must recognize that workers may need an avenue to communicate their grief and anxieties. Some people may be able to talk about the situation with supervisors and co-workers to vent. Others may suffer silently. There are some individuals that may express their concerns even if they support the changes. There are possibilities that some employees may try to undermine change efforts. The key for managers is to allow survivors a period of grief before any expectations of increased productivity are achieved (About, 2003b).

Managers, supervisors, leaders, human resource managers and change agents must be aware of these issues surrounding change and the potential resistance to change during employee downsizing. Managers must support employees in the company all the way through the heartaches of downsizing. An understanding of the normal progression of change during layoffs is essential. Most importantly, leaders should not expect an immediate return to total productivity (About, 2003b).

Employee Benefits

Employee benefits have been a growing financial burden for a company to continue to offer its workers. Some companies may mull over the proposal to trim down or do away with job benefits during nerve-racking economic times. Benefits are necessary to attract and retain highly qualified staff. This dilemma has resulted in some companies to find alternatives to reducing the costs of benefits but without pillaging the benefits package (Elswick, 2003).

One method of achieving these results is to establish higher co-payments for prescription drugs and office visits but counterbalance the additional cost by launching employee Flexible Spending Accounts (FSA) (Elswick, 2003). An additional way to save on health costs is to take advantage of a Health Reimbursement Arrangement (HRA) plan. HRAs offer unique advantages over Flexible Spending Accounts. With this, the employer can obtain a high-deductible PPO plan such as one with a $1,000, $2,000 or $3,000 individual deductible. Switching to a high-deductible plan has the capability to considerably reduce the group’s monthly health insurance premiums. With an HRA, the employer funds a percentage of the deductible even as the employee funds what’s left. The employer contribution is tax-deductible. Apart from the preliminary deductible funding, the health plan operates the same as normal (Spalt, 2003).

A concluding way for fully insured employers to save in redesigning their health plans, for all intents and purposes entails presenting employees with the choice of maintaining their existing level of benefits but shell out a higher contribution rate, or halt their contribution rate but accept a lower level of benefits. In-between options also may be introduced (Spalt, 2003). Introducing modest cost sharing such as these can have the same effect as cutting out complete features of your benefits plan, according to research published in the June issue of Health Affairs (Business Review, 2002).

Proactive Planning

The solution to restraining the effects to budget concerns is to be proactive to economic changes and not reactive to these fiscal fluctuations (Themba-Nixon & Vizeuta, 2003). Businesses can be affected by long term economic recessions and are also vulnerable to the business cycle of an industry. Business cycles are short term fluctuations of the collective economy around its long-run growth path. In order to prepare for the future that affects a companies financing, pricing, and employment strategies, it is necessary to recognize simultaneously how the business cycles and overall economic cycles impact the company (Spurge, 1997).

In order for an organization to be strong during hard economic times, a company is better off being geared up for change during prosperous financial times. A company that has built up cash reserves and has trained employees efficiently will help their positions in a slow economic environment. Those competitors who have not been prepared may be vulnerable to companies that have executed a well designed financial strategy (Themba-Nixon & Vizeuta, 2003).

Companies that prepare themselves for modest economic times may be able to use the situation to their advantage and open up opportunities to capture additional revenue. As the functions of competitors are deeply affected because of bad financial planning, well planned companies may be able to use their competitive strength to their advantage. Customers and clients will also be attracted to the stability and efficiency of the organization (Themba-Nixon & Vizeuta, 2003).

Jabil Circuit Case Analysis

Attempts to interview management at Jabil Circuit were unsuccessful. Therefore, a discussion on the effects of changes in a budget crisis in the company will be derived from personal experience of the author. Opinions of the author will be also included in the analysis.

Jabil Circuit is a company that specializes in the Global Manufacturing Industry. The company was established in 1966 in Detroit, Michigan and now is incorporated based out of St. Petersburg, Florida. Jabil has over 40 locations worldwide in 18 different countries.

During early 2000, the company did not have such a diverse global presence. One location in Auburn Hills, Michigan was responsible for generating 500 millions dollars of the three billion dollars generated annually worldwide. The Auburn Hills plants were viewed as the company’s top location, which was able to produce an outstanding 12% profit sharing bonus for all Auburn Hills employees. The Auburn Hills plants had contacts with Johnson Controls Incorporated, Lucent Technologies, Avaya Communication, Magellan, Motorola, LTX, Cereva, Phillips and Xedia Corporation. The company was flourishing with the success that the economy provided, especially in the internet telecommunications and automotive industries.

The plant could not hire fast enough to keep up with the employment demand. The company frequently brought in engineers by sponsoring workers from other countries such as Mexico and the Middle East to fill these positions. Raises for employees were generous and promotions were readily available for the taking. The company frequently threw parties for the employees to increase morale and to reward those who worked hard as a team effort for their high productivity.

Three years prior, in 1997, the company released half of its employees in the Auburn Hills plant. Survivors of that reduction would repeatedly enlighten workers how malicious and inconsiderate the company was with handling those layoffs. At this time, the plant was mostly comprised of recruits after the 1997 layoffs. For the reason that these new workers never experienced how the company handles employee reductions, and the thriving status of the company, these employees did not take these warnings seriously. The morale of the company was at its height, boasting 4000 employees in the Auburn Hills plants alone.

By the end of 2000, the telecommunications boom started to taper down and entered a period of decline. Avaya and Lucent began to reduce its orders for work. Jabil Circuit had amassed about two billions dollars in cash reserves in preparation for any short term economic crisis that may have surfaced. The company responded by reducing the budget, which place an end to most company sponsored events. Initially these changes had no impact on the culture of the company, the company simply stressed that we needed to be on a continuing pace for efficiency.

In March of 2001, the economy was fluctuating. Despite this, the employees on the Avaya work cell were treated to a fun time at Gameworks with all expenses paid for. This was a result of the work cell producing a record breaking quarter at 47 million dollars. The company then boasted about the 8% profitability of the plant despite the unsteady economy. This meeting later became to be known as the last supper.

The following week, Avaya announced that they were severely over stocked, and unable to move inventory. They did not anticipate any orders for Jabil for the next three months or longer. Jabil immediately responded by firing about 400 employees at the plant. There were no indications that the company was going to cut back on employees and the scene was ghastly. Towards the end of the shift, they separated the employees in two groups and asked one group to enter a room for a meeting. The others would remain on the floor for a separate meeting. They asked the employees to gather their personal belongings because they were going to get to go home early. They took the one group in a room that was full of security officials and informed them that they were immediately terminated. This was unexpected to everyone, knowing that they were just rewarded the week prior. When the door opened, access to the floor was blocked by an army of management and supervisors, only allowing a path to exit the building.

Survivors were deviated by the surprising news. An immediate distrust brewing across the plant toward the company was felt. Productivity started to dwindle and people were constantly in the dark, wonder what the company might do next. Workers were fearful of being unemployed without warning. Jabil had handled the termination of the 400 employees in the wrong manner. This set a negative impact and tone to the culture of the company. These bombshell layoffs were arbitrarily conducted until the middle of 2003, all using deceitful tactics. Each time, employees were increasingly worried about their jobs and not on productivity. Parallels were drawn to compare the company’s layoff tactics to being a solider in Vietnam. The scenario would be as if soldiers were being killed all around an individual, wondering when it would be their turn to get hit. Some workers wished that in the next round of layoffs, they would be terminated just to get it over with.

During the course of these layoffs, the company did not layoff a single foreign sponsored employee. This caused some resentment among the domestic workers. To make matters worse, Jabil used some of its two billion dollars in reserve to acquire plants all around the world. Jobs from the plant were quickly sent out to these newly formed locations. This further put the employees at odds with the company as people were laid off and their jobs were sent overseas.

Jabil Circuit is estimating revenue of 4.73 billions dollars for fiscal 2003. Financially, the company executed its change to the economic crisis with great success. Globalization of the company has brought on enormous change to the company. The impact to the culture of the company, particularly in Auburn Hills has been devastating.

Today, survivors still hold great distrust in the company. Many of them may leave the company as the economy continues to increase and opportunities at other companies are available. The remaining 600 survivors from the original 4000 employees in 2000 will have plenty of warnings for any future new hires within the company. If cutting a budget involves management to be deceitful to employees, they have failed to effectively manage change. However these intangible assets that include company culture and company morale do not appear evident on annual reports.

Conclusion

A company must approach budget cutting with careful strategic planning. This embraces the need for management to be knowledgeable on the assortment of options to be considered and the effects of each decision. The company should take into consideration the ramifications of the cultural characteristics of the company as well as financial impacts. Employees and customers will judge the company by the decisions made during these hard economic times.

References

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