At the conclusion of a workshop last week, I encouraged a question and answer session as I do at all of my workshops. After the final question, several attendees exchange business cards and asked if they could stay for a few minutes to network and get to know some of the other participants. They also asked if I would join them. As someone who encourages ” “networking for life”, I agreed.

Although most of the discussion revolved around the workshop, one person asked the other business owners about their top business concern. I was surprised when the first response was “cutting expenses”. Two other business owners agreed while the others stood quietly, listening. As the three business owners discussed various methods of reducing costs, including employee benefits, employee incentives, and customer benefits, I was biting my lip. After listening to their laundry lists of standard services and employee benefits that were being eliminated, I could not keep quiet and longer.

A significant reason for my success has been the ability to build efficient and lean businesses. Lean does not mean reducing services or cutting employee benefits. Lean means tracking the operational efficiency of everything from operational processes to the technology, tools, equipment, computers and vehicles. That does not mean having old equipment, computers or vehicles. It does mean determining the point at which it is best to invest in new and more efficient equipment.

As far as employees are concerned, highly successful businesses hire the best, most highly skilled, and most competent employees and pay them better than any of their competitors. It is incomprehensible to expect a low-paid, reduced benefits employee to stay around or not to look for a job at a competitor. One business owner responded that is why he uses non-compete agreements. I sincerely hope that that owner does not believe his own words — if an employee is terminated or has a justifiable reason for leaving, such as reduced benefits or pay, non-compete agreements are virtually impossible to enforce in most states. Besides, who would want an employee who doesn’t want to work at their company and why would a business owner want to invest their energy in suing an employee, rather than satisfying customers and generating new revenue? Keep in mind that most employees consider their compensation and benefits to be a reward for their performance and an indication of the appreciation that their employer has for them.

Cutting costs is a temporary and short term solution.

After leading dozens of successful business reorganization and turnaround initiatives, I learned that cost-cutting is often necessary but it is never the ultimate solution. In almost all cases, a maximum of 20% of costs can be cut from a business without having a significant effect on performance and on the quality of the product or service. In a business that is already somewhat lean, cost reductions of 10%, or less, are typical before the quality of their product or service will be noticeably impacted. Most companies went into cost reduction mode early in the recession and there should be no place for further cost cuts at this time, without reducing the quality of products or services that you deliver.

It is 2011, four years since the recession began, and the economy is gradually but steadily improving. It is incomprehensible that any business is operating with a primary focus on cutting costs. It is time to bear the fruits of the cost cutting and efficiency improvement measures that should have been implemented years ago and maintained.

During the past two years, a select group of businesses have doubled revenue, doubled and even tripled profit margin, expanded their marketing area and expanded into new industries. Each company is unique but each of those business owner approached me with the desire to maximize opportunities. The “cost cutters” are often the business owners who decided to “hunker down” until the economy fully improves and until things “get back to normal”. Either strategy is okay. The problem is the economy is not going to return to the previous “normal” and “hunkering down” is only going to help a business to lose market share and the profit that they could be earning.

When I travel on business, I often stay at business class hotels such as Holiday Inn Express or Homewood Suites. Last week, I stayed at a Holiday Inn Express in Philadelphia. In my room, I noticed that several of the complementary items that had been standard were gone. There was no complementary coffee. The mouthwash, shampoo and conditioner were gone from the bathroom. When I went to iron my clothes, there was no ironing board. I called the front desk and was informed that ironing board are now available on request and one was delivered to my room about 30 minutes later. I thought it was a joke. The ironing board was only about 24 inches high, which is significantly lower than the bathroom countertop. When checking out, in response to my question about the noticeable elimination of basic amenities, the front desk manager rolled her eyes and stated that the reductions were cost savings efforts. Meanwhile, the price of the room increased by $20 per night since my last stay. The front desk manager added that they have not been quite as full as in the past, ever since cutting the services.

When I went to the business center to print my boarding pass, the printer and copy machine were gone. I had to wait in line at the front desk to get my boarding pass because some bean counter decided to eliminate the $200 printer from the business center.

When traveling on business, I always stay at a business class hotel, rather than a 4-star hotel. The weekday business traveler is the lifeblood of these hotels. The front desk manager stated that there has been a noticeable reduction in business guests. I will add to that reduction as this hotel chain has been demoted to my “last resort” list vs. my “preferred hotel choices” list. All this so they could save $3 on an ironing board, $.05 on a printer page (boarding pass) and $.10 on a bottle of shampoo?

In tough economic times, the single most important activity is retaining customers. It is five times as expensive to gain new customers as it is to keep existing customers. As the economy improves, customers and employees will remember, perhaps more than ever, how they were treated by businesses during the recession. There is a reason why some companies have weathered the recession well and others have suffered tremendously. For some it is due to industry trends or market conditions that were out of their control, but there are many times when the business owner could have been more successful by being proactive rather than reactive. Cost-cutting is a purely reactive and short term, tactical move. It is not a strategic move and will not provide long-term benefits.

It is often the bean counters who recommend the cost cutting. Business owners must realize that the financial/accounting function is only one skill set of the many that are required by a successful business. Success requires integration of technical, operational, process, marketing and financial skills. As someone with a strong financial background, I cringe when a business owner states that they are relying primarily on the advice of a CFO, controller or financial advisor to determine what actions they should take, without integrating the advice of people with experience in each of those other key skill sets.

When you make the mistake of Holiday Inn, you fall short of the customer’s expectation in the name of lowered cost. Don’t take the cheap route, like Holiday Inn or the three business owners that I met at the workshop. You will lose a customer over a few bucks. It’s always better to over-spend on customer retention than under-spend. If you lose the customer, you can’t “un-ring” that bell. The same goes for employees.

Venting aside, low-cost business models can be a powerful ally. And they were helpful for many businesses early in the recession. However, now is not the time for most businesses to be focused on cost cutting. Make sure that the level of customer service and satisfaction is acceptable as well.

A colleague recently asked me to speak with his brother-in-law, who owns a manufacturing company. The brother-in-law was having some problems with the business. I was surprised at how defensive he was during our call. When I offered to meet with him, he said that he devotes all of his time to his business, he has no free time to meet, and there is nothing different that can be done to change his business.

My response was “maybe, or maybe not; you never know but it could be worth your time to meet”.

The businesses owner believed that he is doing everything that can be done for his business and his solution is to do what he has always done and — work long hours, 7 days a week. That belief is wrong. Doing more of what got you there isn’t going to change things.

Common wisdom is that there are two certainties in life >>> death and taxes. Here is another certainty: If you keep believing what you have always believed, your future well-being and success will pretty much mirror your current state of well-being and success.

This is true in both your personal life and in business. Keep in mind that any change is tough. That’s why over 86% of change initiatives in business fail. It’s also the reason why business owners that are truly committed to change ask for help and quadruple their odds of success.

Are you open to changing or updating your beliefs?

The beat goes on.

By now, you’ve probably heard that President Obama is going to support an extension of the tax credit in exchange for Republican support for unemployment benefit extensions. You’ve probably also heard the Democratic grumbling about the President’s decision. The point is not which party you support but the bi-partisan negotiations and discussion that are necessary for a successful economic recovery. Just as Americans have different views and opinions; it’s OK for the politicians that we elect to have differing opinions. The point is that no one gets everything that they want; we all have to give-and-take a little. Unfortunately, many of the politicians still don’t get it.

We acknowledge trouble in European economies, we watch the legislative stalemates, and we are bombarded with the latest inanities of pseudo-celebrities. Yet, retail sales are up, housing is slowly recovering, car sales are surprisingly strong, luxury goods are doing well, and more jobs are being created. I was in Macy’s on Monday at 2:00 PM and had to wait for 10 minutes to check out. The customers were friendly and in the holiday spirit. Most of all, the customers were spending money. The economic improvement may not be as fast as we would like but there is no switch or magic pill that will provide instant results. It will take time. You need to stand back and look at the bigger picture – the trend. Overall, the recovery is moving from “slow” to a slightly higher speed. Things aren’t great, but they are getting better. The best way to escape the “economic pessimism” is to refuse to be a party to it – don’t listen to it. Remember that the doom and gloom news is what gets viewers to watch the news. Look for the opportunities, and orient your personal and professional endeavors around them. And if professional “victims” want to sing the blues, allow them to sing solo.

Enjoy the holidays and choose to be part of the economic recovery!

It doesn’t matter if you are a corporate executive, own a business or are an employee, business has changed. During the past year we have all heard people say that they are anxious for things to get back to “normal” or “to the way it was”. This is the new norm. Things are different and they will continue to evolve.

During a meeting this week, an executive complained that as the CEO of a publicly traded corporation he must sign the financial statements each quarter. He remarked “do you realize that I am not signing as the CEO, but I am signing personally that the financial statements are accurate?” He continued “every time that I sign those documents my house and personal property is on the line”. He was complaining about Sarbanes-Oxley (SOX) requirements and other regulations put into effect as a result of Enron, WorldCom and other companies that misled their investors. In effect, he was complaining that he has to do his job to make sure that the financial information distributed by the corporation that he runs is, to the best of his knowledge, accurate.

Another change is the reality of high unemployment rates. A government report this week suggests that unemployment will stay relatively high for quite some time and that it will take until at least 2018 for unemployment to decrease to the 5 to 6% range. Further, the new employment reality suggests that over the next decade many employment opportunities will be project based rather than ongoing employment. There will be more solo businesses, consultants and independent professionals. People will continue to change jobs and change careers more frequently. Further, many benefits will change significantly; as independent contractors many will not have paid holidays or paid vacations, and health insurance will become more difficult to obtain.

A third sign of change and the need for us to adapt is the reality that the US position as the top economic power continues to change as that power and influence transfers to the new economic powers. This is a concept that will be difficult for many Americans to fully grasp. In 2008, the President advised Americans that the government needed to make loans to US car companies, banks and insurance companies in order to avoid certain economic catastrophe. While many of the banks have repaid significant portions or all of their loans and many have returned to paying high bonuses, General Motors (GM) sales are improving but the US government still owns 61% of the company.

GM is planning to sell more than $1 billion worth of shares in the Middle East and Asia and China’s largest car company is negotiating to acquire a stake in GM. As a result, the US governments stake in GM will be reduced to approximately 35% but the fact remains that a significant amount of the stock will be held by SAIC Motor Corp and Middle East and Asian investors.

Most people have a preference to keep things the way they are and they have a natural resistance to change. That is one of the reasons that change initiatives in organizations fail more often than not. The most successful change initiatives often occur when the stakeholders are all fully informed and they agree to adapt. Regardless of the change taking place, whether it be a change in employment opportunities, the skills required to perform a job, the benefits offered, the requirements for a business to act ethically, outsourcing of jobs, or foreign investment/acquisition of US businesses, the businesses and individuals who assess the new opportunities and adapt will be the ones that succeed.

With regard to yesterday’s blog post about the Chilean miners, today’s New York Times ran the following article:

“Rescued Miners’ Secrecy Pact Erodes in Spotlight:

The miners rescued in Chile have asked for as little as $40 and upward of $25,000 for an interview” (article by A. Barrioneuvo and S. Romero).

Stay with me for insights into the world around us as viewed through Stratipoint.com, the place where business strategy, integrity and a contrarian view blend.