Wake-up Call: When cost-cutting can cost companies

When our last receptionist asked if she could leave an hour early each day at a reduced salary so that she could get home to her son, I initially jumped at the chance to save some money.

I never envisioned losing a major potential client who called our office two weeks later at 4.45pm, left a message on our main line’s voice mail, and then wasn’t very interested when I responded the next day.

I did not regret granting my employee’s request for a family-friendly schedule, but I did wish that I had used the recouped cost to hire a temp to cover any important end-of-day calls.

But I was only focused on the bottom line. Many executives similarly lose sight of the fact that cost-cutting can sometimes go too far, undermining the vitality of their organisation. Cheryl, a sales manager for an electrical supply distributor, recently bemoaned to me the cost-cutting that has ravaged her firm, which merged years ago with a larger competitor, then was bought successively by three private equity companies.

With each transaction, the new owner cut headcount, available inventory, technology and travel allowances. Now their clients complain frequently about their lack of responsiveness and delivery delays. When the clients had other options, Cheryl said, they had begun to move their business to other distributors.

As a small company chief executive, I pay a lot of attention to ways we can save money but also maintain the same level of service and employee morale.

For instance, our health insurance costs have mushroomed over the nine years of our company’s existence, but we have adapted to adjust to annual price hikes, not by switching to the cheapest plan, but by switching to a slightly cheaper plan with a higher deductible, and promising our colleagues that we would reimburse them a certain amount each year. We have saved significantly by making that change.

Similarly, we started our corporate life using a venerable Boston law firm. After our first enormous bill, it became clear that we might run out of money because of legal bills before we actually received regulatory approval to start investing for clients. We asked friends for recommendations, and moved our account to a much smaller law firm where we use a wonderful partner whose rates are in a more appropriate triple-digit zone.

Finally, we have eliminated some redundant and expensive stock market research that few people were reading.

So yes, it is important to streamline your costs, especially if you've let them get bloated. But incremental expense cutting in an already-lean organisation can threaten your corporate mission as well as your culture. The ultimate cost could be your business. – Copyright Harvard Business Review 2014 Karen Firestone is the president and chief executive of Aureus Asset Management