The downside of downsizing

Companies thought that recent cost cuts would push them out of the doldrums--or at least boost earnings enough to please shareholders. That hasn't happened. Is another round of cuts in order?

Lawrence Serven, a principal at ButtonwoodLLP.com, a Stamford, Conn.-based management-consulting firm, doesn't think so. "Two years ago, there was plenty of fat for CFOs to cut, but now [companies] are pretty much down to the bone," he says. Serven insists that companies that make cuts blindly could do more harm than good. "It's a mistake to make across-the-board cuts when you don't know where the efficiencies will come from." He expects a renewed focus on process-improvement techniques, such as the reengineering practices that were popular in the mid-1990s, to replace deep cost-cutting.

Some companies are hoping that past cuts will start to pay off this year. LuAnn Hanson, CFO at Ramtron International Corp., says cutting almost 5 percent of costs at the $47 million semiconductor company in the past two years will make future budgets easier to handle. "We've figured out during the last few years how to do more with less," she says. Hanson expects only normal attrition for 2003.

Kevin Gregory, CFO at $424 million information-and-content provider ProQuest Co., says additional cost cutting was abandoned, not because it wasn't needed, but because it couldn't be done. "A lot of costs were taken out already. If you get any more downsizing, you're not going to be in a position to react when the economy turns around," he cautions.

Companies that are continuing to cut costs are focusing on the little things. For example, Agilent Technologies Inc., in Palo Alto, Calif., recently prohibited employees from relocating their desks, which can cost up to $200 in service fees.

Serven adds that companies would do well to pay more attention to budgeting and planning to avoid cutting too much. "If you know where you want to be, you can figure out what you need to get there," he says.

THE BOTTOM LINE: Blind cost-cutting can put companies at a disadvantage when the economy rebounds.

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