Most CEOs believe a recession is inevitable, and they're going into cost-cutting mode.
But successful budget cuts must be strategic and target areas that won’t disrupt daily operations or impede long-term growth. As such, real estate and facilities are often the first expense placed on the chopping block, according to a Gartner survey of more than 200 CFOs.
Workers no longer need large, private offices to feel valued. In fact, many want the opposite: never to return to the office. After two years of working remotely, employers are coming to accept work from home as a win-win scenario to reduce their budget and provide workers flexibility.
Ironically, finance departments are next in line for cutting. “When CFOs move into cost-cutting mode, they feel like they need to tidy up their house first because they don't want to look like hypocrites,” says Marko Horvat, vice president at the market research firm Gartner. Those cuts typically come from back office and bookkeeping functions rather than the strategic or regulatory teams that work on mergers and acquisitions or SEC reporting.
Companies are also slashing travel and expense budgets. Flying employees to a sales meeting or to close an in-person deal looks less appealing when businesses are tightening their belts, Horvat says. Marketing often sees budget reductions, too, prioritizing initiatives that maintain profitability over those that expand into new market opportunities. Similarly, third-party contracts, such as consultants or suppliers, are some of the first to see the door because they have relatively little impact on a company’s day-to-day operations.
Despite incessant layoff news within tech, most companies aren’t making sweeping talent cuts. That’s because they’re focused on short-term, nonessential costs and because of an unusually strong labor market. “There's still a mismatch between the demand for good talent and the supply of good talent,” says Bain partner Jason Heinrich. “Organizations need to be thoughtful, so they’re not letting good, valuable talent go and finding it difficult to replace.” It’s a frustrating bind that CEOs seem to be aware of. Over half of those interviewed in a KPMG survey say they’re considering downsizing their workforce over the next six months, while 92% expect headcount to increase over the next three years.
Layoffs will, of course, always be the most contentious budget cut because of the human element. But Horvat believes the pandemic has taught companies they can’t treat employees as a resource to be scaled up and down at their whim. Staff cuts, he says, should be the last resort rather than the opening salvo to recession-proof a company.
Ultimately, cost-reducing measures should be in service of helping the firm emerge stronger from the economic downturn. In a report he authored in July, Heinrich wrote that while an economic downturn induces notable losses for companies, it can lead to huge gains for those best prepared to trim the corporate fat. As the adage goes, never let a good crisis go to waste.
