Things Are Going Fine—Time to Cut

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By: Russell Pearlman

Inflation is abating in many parts of the world. Global growth is outpacing the projections of most analysts. And economists, many of whom predicted a worldwide recession a year ago, are changing their tune. Growth might slow soon, says Ellen Zentner, chief US economist at Morgan Stanley, but the US and Europe will avoid a full-blown recession.

At a time like this, it may seem counterintuitive to be thinking about how things might go wrong, and how to respond if they do. But experts say it’s useful to figure out what to do in case the economy takes a turn for the worse—before the economy actually takes a turn for the worse. All too often, many organizations wait to act until they have a problem—at which point they don’t have time to make the right trade-offs for the long term. “Fix the roof while the sun is shining,” advises Paul Leinwand, a professor at Northwestern University’s Kellogg School of Management and co-author of Beyond Digital: How Great Leaders Transform Their Organizations and Shape the Future.

This approach is certainly not top of mind among most businesses. Layoffs may have dominated the business pages earlier this year, but in a recent Korn Ferry survey, only 22 percent of companies worldwide said they had trimmed their workforces. In the US alone, nearly 10 million jobs remain open, close to a record high, and unemployment is near all-time lows. Capital spending has soared since the middle of 2020. After a slight dip in 2022, US firms spent nearly $7.6 trillion on factories, machinery, and other equipment in the first three months of 2023, a record.

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So why preach caution? Experts say savvy companies use cost management when times are good: They put their money where their strategy is, as Leinwand observes, continually cutting “bad” costs and redirecting resources toward “good” ones. There are always ways to trim marginal expenses. Leaders might ask everyone to comparison-shop for insurance providers, outside marketing-support firms, and other vendors to make sure they’re getting the best deals possible. A dollar saved now is a dollar managers won’t have to cut when times are tougher.

Taking advantage of good times is also a way to evaluate how strategic leaders are with their hiring practices. Instead of just onboarding as many candidates as possible—and accumulating additional expenses—ask if the new hires will still be essential if the business stops growing at its current pace. “Are these hires a three-month decision you’re willing to undo, or are you making long-term investments?” asks Juan Pablo González, sector leader for Korn Ferry’s Professional Services practice.

Leinwand suggests that companies rethink costs in terms of capabilities—in other words, what the money spent allows a firm to do. For many organizations, which typically just assign a cost to a particular department or team, this is a different way of looking at expenses. Reimagining costs as capabilities isn’t necessarily easy. It can cause strife within organizations used to having major control over their budgets. However, the new system allows senior leaders to figure out what’s really needed to succeed in the marketplace.

Another tactic: Ask department leaders to list all the expenses of their group, then to hypothetically remove them. Ask them to decide which ones need to go back in—and which don’t. “It lets you break free of the budgetary practices of the past,” says Leinwand.

Of course, if things do go south, then cutting back could mean trimming head count, perhaps by a significant margin. The decisions to do so should be swift, experts say, but not without consideration for the long-term impact of what the organization is giving up, and what it’s asking of its remaining employees. “It’s easy to quantify the savings, but it’s much harder to qualify the collateral damage,” says Maria Amato, a Korn Ferry senior client partner specializing in cost optimization.