On reducing staff costs

Contributors: Lesley Dewhurst, Steve Donnelly, Dr. Jerald L. Feinstein, Benjamin Greig, Milind Kher, Dr. Ravi Kumar Sharma, Sally Thomas, Dr. Ross Woods. 2017

If an organization stretches all its employees to reduce costs, will it get diminishing returns rather than productivity gain? Probably. Somebody once said, "You can only whip things so many times before it runs away, dies or bites you."

I think it might depend on several factors:

Otherwise, I'd generally agree. Pushing employees to reduce costs only works for a while. Eventually most people become physically tired. Oddly enough, however, people don't realize how tired they’ve become until they stop. Fatigue has significant effects:

The organization pays a heavy price if employees feel undervalued, that their remuneration is inadequate, and that their career opportunities are minimal. These can put a large dent in profitability and a gradual downturn in fortune:

In some circumstances, better remuneration can result in lower overall costs. That's counter-intuitive. (Admittedly, of course, there have been cases where workers are paid too much and this puts financial strain on the business.)

It is never a good idea to stretch all resources to the limit. Organizations always need to maintain a certain buffer to be ready for emergencies. Building slack into the system makes it robust.

It is a mistake to target human resources first for improving profitability rather than focussing on other areas. The easiest way to increase profitability is to keep labor costs down, but sometimes it might be the lazy way.

Stretching human resources needs to be delicately balanced with other aspects of the business. In some cases, the organization needs to be more creative drawing out the best of its workforce. In other cases, it is not that costs are too high, but that income is too low. Look for problems elsewhere in the business, such as product design, sales, distribution.