The toilet bowl effect

Back when I ran a business, I marveled at the short-sightedness of competitors who used cost-cutting as their primary lever to drive profitability. In the face of threats or risk, their first move was to slash costs, usually by laying off people. It is a loser's strategy.

That's not to say a business should never cut costs. Sometimes you simply have to in order to survive. But once you begin down that road, once you adopt an austerity mindset, the game is over. In the long haul, you cannot cut your way to sustainable profitability.

In the case of my business, we lost a big client one year and it wrecked our financial situation. We cut costs, yes, but we also borrowed a million dollars, twice as much as we actually needed, with the intention of investing in our future. Some thought we were crazy, but we had confidence in our ability to choose a winning path. We made a big bet and it paid off a fifty times over. While competitors retrenched, we built new capabilities, hired the best talent, and kicked ass.

When it comes to government, today's Republicans and scaredy-cat Democrats have doubled down on austerity in the mistaken belief that you can cut your way to prosperity. The result is an entirely predictable downward spiral, the toilet bowl effect, which is accelerating even as elected official continue their happy talk about economic competitiveness and growth. They've got it all wrong.

Comments

Just heard from one of the people I laid off

I suppose it's not surprising that he's angry after almost 20 years. I would be too.

Laying off people is the hardest thing in business. It's the main reason I got out of management and started freelancing.

When you can't make payroll and have to cut costs, there aren't a lot of options. Our first cuts were owner salaries, which went to zero. Then we laid off staff, keeping the people who were critical to important client relationships.

For what it's worth, as I said at the time, I'm sorry.