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The few companies that thrived all embarked on a second chapter, focused on growth and innovation. (Thinkstock)
The few companies that thrived all embarked on a second chapter, focused on growth and innovation. (Thinkstock)

MONDAY MORNING MANAGER

Cutting costs won't transform your business, try these eight tips instead Add to ...

When companies hit economic trouble, senior managers often rally behind the banner of transformation. They announce the firm must dramatically overhaul itself to attain a better future, and invariably start (and end) by cutting costs.

Those outside the executive suite have become jaundiced about such transformations, viewing them as little more than budget-slashing exercises that lead, at best, to a modest change in fortunes. A recent Boston Consulting Group study suggests such cynicism is correct: Researching as many transformations as they could, the consultants found that 75 per cent failed.

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Yes, there were promises of better times with monikers for the transformation efforts such as “Phoenix” and “Inspire.” But the fixation was cost-cutting and that didn’t lead the majority of companies to rise from the ashes.

Still, some firms were successful. Better days did arrive. In comparing the successful companies with similar ones that failed, the consultants came up with a compelling overall principle to follow, and some specific guiding measures.

All the companies – successful and unsuccessful – did cut costs. But the 25 per cent of those that thrived didn’t stop there. All embarked on a second chapter, focused on growth and innovation.

“In chapter two, successful companies went beyond necessary but insufficient operational improvements and deployed a new strategy, vision or business model that they refined over a multiyear period,” Martin Reeves, Kaelin Goulet, Gideon Walter and Michael Shanahan write in BCG Perspectives.

That seems simple: To change, you must discuss truly transformational objectives – and implement them. But 75 per cent of companies fail to take that road. They get hooked on slashing. Or they lack the quite different leadership and execution skills required by the second chapter.

It’s important to recognize that when companies hit economic trouble, chapter one is essential. Skipping directly to chapter two doesn’t seem viable; all the companies studied went through a cost-cutting phase. “It’s painful but not that hard,” Mr. Reeves, a senior partner and managing director based in New York, said in an interview.

The dangers in chapter one are delaying too long so the economic reversal becomes a crisis, or not cutting deeply enough initially, resulting in several phases of retrenchment that demoralizes employees.

Chapter one should be quick and focused, driven from the top. Usually, it will take about 18 months to complete. But it should be carried out with the purpose of setting yourself up for success in chapter two, preparing yourself to grapple with growth and innovation.

The consultants identified eight factors that seem crucial for success in chapter two. Not every factor showed up in every successful transformation, but most were usually present:

1. Turning the page

Companies must make a conscious decision to go beyond cost-cutting and focus again on growth and innovation. The executives invariably promised a glorious future when they launched the effort; now they must truly seek that transformative time.

2. Creating a new vision

The business had been failing for a reason. It was out of sync with prevailing market conditions or with customer needs. Now the operation must be reconfigured. A new strategic direction is needed, which will probably come from experimentation. “It sounds like an obvious thing. But companies under siege, cutting costs, can lose sight of this,” Mr. Reeves said.

3. Innovating from the ground up

The company must transform itself in multiple dimensions – not only in products and services, but also in various aspects of its operations.

4. Staying committed

The transformation will take much longer than the cost-cutting – what Mr. Reeves calls “an inconveniently long period.” It will be a long and lonely period for leaders, with no manual to guide them. The CEO must drive the process and stay committed. “If you don’t have a long time frame, it’s unlikely you will pull this off,” Mr. Shanahan said.

5. Shifting as needed

The company must be willing to shift from the historical core business model. The new approaches will need to be protected from attacks by existing power centres, perhaps by being placed in separate units.

6. Adapting approaches

Success will come through trial-and-error, with several attempts and failures. Where chapter one was highly programmed and predictable, now the executives must be flexible, shifting with the tides.

7. Taking multiple shots

Companies can’t pin their hopes on a single move. Instead, like a hockey team, they want to make a lot of shots on goal, trying a variety of approaches so they can score with some.

8. Having patience

Chapter two is messy, and requires patience. “If you have a short-term orientation, you will probably get chapter one right but you won’t get chapter two right,” Mr. Reeves said.

But to be victorious, you need to succeed with two chapters. Don’t just cut costs.

Harvey Schachter is a Battersea, Ont.-based writer specializing in management issues. He writes Monday Morning Manager and management book reviews for the print edition of Report on Business and an online work-life column Balance. E-mail Harvey Schachter

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