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How to Cut Costs to Avoid Cutting Jobs

Pick any sector and you'll find empty offices and barren cubicles: banking, health care, media, technology, retail. All have thrown thousands upon thousands out of the workforce, which is why the nation's unemployment rate has almost doubled in the past year or so to around 9.5 percent.

Yet you know that blanket job cuts create their own set of problems. They wreck morale among those remaining on your team, and they are all but certain to leave you shorthanded when business finally cycles back up. Plus, there's the human factor: laying off good people is just about the worst part of managing. This is why you should turn to layoffs only after you've tried just about everything else. So before you sign the first of those pink slips, think about these alternatives:

1. Let everyone share the cost-cutting pain.

During this downturn, the CEOs of FedEx, Wynn Resorts, and Marriott International are among the C-Suite execs that have cut their own compensation to show the rank-and-file that they aren’t immune from the bad times. But no one has taken the we’re-in-this-together approach as seriously as Paul Levy, the CEO of Beth Israel Deaconess Medical Center in Boston.

This year, Levy needed to slash $20 million from his hospital’s budget. The quickest way to reach that goal would have been to dismiss 600 of his 6,500 full-time employees, but Levy was determined not to do that. Levy enlisted his entire staff, from clerical workers to the best-paid doctors, to recommend ways to cut costs and spare jobs. In March, he held town hall-style meetings at which thousands of employees brainstormed and offered up ideas. He set up a Web site chat room for people to discuss suggestions. He invited employees to email him directly, and he wrote about the whole process on his blog, which is called Running a Hospital. “I wanted us to have employee buy-in,” says Levy.

Within just a few weeks, the group had agreed on enough changes that Levy managed to squeeze almost the entire $20 million out of the budget. Ultimately, he still had to cut jobs, but the team effort winnowed the number down to just 70 positions.

The bulk of the savings came from workers offering to take pay cuts. Vice presidents and senior vice presidents, for example, agreed to forgo $1.4 million worth of salary. Employees encouraged the hospital to halt matching 401(k) contributions, which saved another $3.5 million. Some employees gave back recently awarded raises, while others agreed to forgo pay they were owed for time off that they didn’t take. Smaller efforts helped as well. Employees suggested that the hospital stop paying for work-issued BlackBerries, cancel the company picnic, and end catering for staff meetings.

Initially, Levy says his idea was met with surprise by other hospital execs, particularly the CFO. But all were quickly heartened by the sacrifices most employees were willing to endure for the sake of the hospital overall.

2. Fire your customers.

Sometimes, it’s your customers that are costing you too much. The solution: Get rid of them. Early this year American Express sent select customers $300 if they agreed to pay down and close their accounts. In addition, Amex flat-out closed 2.7 million accounts because they had zero balances or had been inactive for two years. For American Express, having “bad” customers — people who frequently fall behind in their payments, or who don’t use their accounts — was impeding its ability to seek and serve the more lucrative ones.

In this economy, companies should take a hard look at firing some of their customers, suggests Frank Burkitt, a lead consultant on Deloitte Consulting’s supply chain and operations practice. The problem, he says, is that when times are good businesses aggressively go after customers to grab market share, even if initially those customers cost them money. But when the economy takes a sudden turn south, they end up saddled with a whole lot of costly customers. The downturn worsens the prospect of those people becoming profitable customers, and continuing to serve them can even cripple a business.

3. Dump costly products.

Companies should ask themselves what else they could jettison besides employees. These days, everything is on the table: entire product lines, real estate, patent portfolios.

Just look at General Motors, which spent 40 days in bankruptcy and got rid of its Hummer and Saturn lines, and is the stronger for it.

Streamlining the business often has unexpected benefits. Burkitt points to the case of a $6 billion U.S. telecom company that cut back its product mix and saw the productivity of its salespeople jump 21 percent. It turned out that the sales reps were more successful when they had fewer options and services to sell. As a result, customer turnover fell by 35 percent.

Figuring out what products to dump requires taking a close look at all the costs associated with each product. The formula is straightforward but needs to be detailed: Take a given product’s revenue and subtract what it costs to bring it to the customer. That includes costs of production, marketing, sales, fulfillment, and customer service. The process can be revealing. “There are always hidden costs that crop up in business and build up over time,” says Burkitt. And measuring something really closely is the first step to figuring out where you can make improvements, save money, and keep your business humming through good times bad.

4. Renegotiate contracts.

When your business is in trouble you’d be foolish not to demand more favorable deals with your vendors and suppliers. So why not your workers? Microsoft in February began cutting pay to the contract workers it hires via outside agencies, lowering existing contractor pay by 10 percent and reducing pay for new contractors by 15 percent. Popular? Not with the workers, some of who have formed a protest site to rant. But in this job market, they have little choice — and it’s better to keep more people working for less money, than have to get by with fewer workers.

When it comes time to negotiate with your vendors, don’t just think about price. If you’re concerned about spending more than you should — and who isn’t? — you might want to take what David Fields, president of Ascendant Consulting, calls an “options approach.” That’s where you pay the vendor different rates for different levels of service. You might, for example, structure your contract so that you pay one amount for on-time delivery for something key to your manufacturing process, yet a lower amount for something less critical. In short, he says, the terms of your contracts should reflect the priorities of your business. “The idea isn’t that you beat up a vendor,” says Fields. “It’s that you make contracts more effective.”

Structuring your vendor relationships this way can save huge amounts and, says Fields, is far more efficient and productive than turning to across-the-board job cuts.

5. Go for cheaper tech.

If your shop needs a tech upgrade but you can’t afford it, consider the cloud. Increasingly, businesses are finding they can do almost all of their computing with free or cheap services that store your data on remote servers — that is, in the cloud. Moreover, there is so much good free software nowadays, including office suites with word processing and spreadsheet software, that this is often a no-brainer. Check out or the increasingly popular applications offered by Google.

Cisco even figured out a way to save on in-house tech-support staff. About a year ago it created a self-serve tech support wiki for its Mac users so they can troubleshoot problems themselves before calling IT. A Cisco spokeswoman says that the wiki has saved the company $1.6 million, and that, thankfully, is more than few annual salaries.

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