Lemons to champagne part 2

Play #2: Don't Downsize, Upgrade

Personnel costs, especially for the sales force, offer a tempting target for cost reduction. Many companies, however, make the mistake of approaching a reduction in force solely from a budgetary standpoint instead of considering the value of their most important asset. For example, they may compare the compensation for each sales rep against the total gross margin of his accounts and shoot the guys with the worst ratios. Unfortunately, this approach won't account for growth, differences in territory potential, strategic sales objectives or other factors that are vital for your company's success. A better approach is to let the poorest performers go and then rework the account assignments as necessary.

Most companies also make the mistake of failing to exploit labor market opportunities during an economic downturn. They focus on reducing headcount instead of upgrading the quality of their staff. Remember when it was impossible to find good salesmen or managers even at ridiculous salaries? Well, this is your chance to grab that top talent that wasn't available to you last year (and may not be available next year). Also, don't limit yourself to the unemployed. In their "defensive" zeal to cut costs, many companies have reduced compensation plans or increased the workloads for top performers, creating a pool of disgruntled candidates.

Once you've determined that a force reduction is needed, think strategically to get the maximum benefit from a painful exercise. Keep in mind that approximately the same number of people will be terminated in any scenario - your options are limited to determining who will be sacked rather than how many.

• Don't rely solely on department managers to select the staff cuts. The managers will invariably select the people who will be "easiest" to let go rather than the poorest performers. You will tend to lose more of the lower level employees (because their jobs are easier to re-assign), thus mitigating the cost savings. You will have lost the opportunity to weed out poor performers simply because their removal would inconvenience their managers. A better approach is to use recent performance appraisals and solicit input from additional sources like customer surveys and other managers.
• Don't depend on voluntary early retirement. Although it may seem a fair and simple approach, you will tend to lose the best performers who are most marketable elsewhere. Also, this option usually entails substantial payouts to be effective.
• Don't cut "rank and file" pay. Another reasonable sounding alternative that almost always turns out bad. Unlike layoffs, pay cuts leave the affected people in place to spread bitterness and resentment. You will hurt morale and also lose the opportunity to unload your poor performers. Across-the-board reductions in upper management pay, in contrast, are a viable tactic. Your top management team should be more receptive because they have a bigger stake in your company's future and better visibility of its financial condition. In addition, such cuts will probably save more money and send a strong message of commitment to the rest of your staff.