Cutback Planning – Consultation in a Time of Retrenchment

This post has been co-written with Dr. Kem Lowry.

In 2007, Nassim Nicholas Taleb, a finance professor and successful trader, wrote a book called The Black Swan. The phrase “Black Swan” is a metaphor for improbable and unanticipated events that have far-reaching ripple effects. Some examples are the 9/11 World Trade Center attacks, the launching of Sputnik in 1957, and the 1991 dissolution of the Soviet Union.

The current Covid-19 pandemic is a Black Swan. It arrived suddenly and will have major financial consequences from an economy unexpectedly shut down. Whether we are headed into a recession, deflation, or depression isn’t yet clear but whatever comes, it won’t be pleasant.

Leadership in Tumultuous Moments

Imagine you are director of a government agency that has 2,878 employees working in different divisions, branches, and locales and has been told to reduce its budget by 25%. Or, you are CEO of a small manufacturing shop that has 63 employees and you have to furlough at least 13 of them. Or maybe you are chancellor of a university, executive director of a not-for-profit agency, or a suddenly out-of-work head of household with a large extended family.

Unexpected belt-tightening is unpleasant. It unravels expectations and invokes fear. The more severe the shock, the more severe the manifestations can be. If you are a leader, you are also suddenly thrust into “crisis management” mode, which raises questions. What is your strategy? How will you go about making cutbacks and get smaller? Whom should I consult with?

The purpose of all strategy is to establish a desired position at a future point in time, stay productive, avoid aimless wandering, and minimize unproductive conflict. A strategy can be longer or shorter, more detailed or more general. The usual response is some version of official dictate, a decision in which you make short and long term gambles simultaneously.

In Thinking in Bets (2018) champion poker player Annie Duke says bets are the very tough decisions we make when there are serious consequences and we are under time constraints. Just like the politics of retrenchment, her big poker bets have high stakes, much at risk, and reputation on the line.

Our Experience

Both of us have had to make these kinds of bets. Both of us have served as senior leaders in complex enterprises with large budgets that had to be reduced because of Black Swan events. Both of us have also worked extensively as mediators, facilitators, and organizational consultants.

While every business, government, and civic organization has its own norms and expectations of engagement, here are some of the ideas we draw on when we are asked to help leaders and groups make hard decisions and they need to consult and engage with others in their organization.

1. Acknowledge Anger, Fear and Uncertainty. Find (or create) venues and opportunities for people to acknowledge the emotional and financial turbulence they are experiencing. Don’t start a discussion with numbers and dollars. Encourage people to take their formal hats off and speak personally about the impacts of the current crisis on them, their families, and the people they supervise or depend on. People will naturally go to their fears. Facilitate the discussion without prolonging it.

2. Commit to Group Engagement. Consultation can involve many forms including individual interviews, surveys, task forces, large group meetings and other problem solving initiatives. Choose one or a combination that serves the size, organizational culture, time, and resources available.

3. Preliminary Work. If circumstances allow, do a few strategic interviews or a survey to gather early thinking on (a) major concerns and worries; (b) the top items for preserving and keeping; and (c) what issues will be most critical for a focused discussion. Part of good preliminary work may involve identifying lessons learned from previous cutback exercises.

4. Agenda Setting and Ground Rules. Explain the agenda and clarify the task, timeline, and scope of discussion. Explain that there needs to be recommendations at the end. Put explicit ground rules in place for what is usually a difficult conversation. For example:

• This discussion is advisory to senior leadership, not decisional.
• Everyone is expected to look at what is essential for the whole
  enterprise rather than advocating for individual departments,
  divisions, or branches.
• Refrain from meeting “hijacks.” No one monopolizes the floor and no
  one speaks twice on a subject until everyone else who wants to has
  spoken once.
• Civility and courtesy are the order of the day. Disagreement during
  this deliberation is fine but the focus is on smart debate. Let everyone
  know that the discussions are preparatory for a series of straw votes
  on recommendations later in the meeting.

5. Develop Collective Assumptions. Discuss “Knowns”, “Known
Unknowns,” and possible “Unknown Unknowns.” Ask everyone to do a
brief crystal ball exercise and identify her or his key economic, political,
social, and legal assumptions. The objective is not a wish list. Hope is not
a strategy. For this one, people need to use their minds and critical
thinking, not their hearts.

6. Identify the “Unchangeables” and Non-Negotiables. Every organization has a central mission and core parameters that usually must still be honored even in a time of cutbacks. Identify and prioritize what central functions must continue.

7. Criteria and Principles. Before discussing specifics, make a list of the criteria or principles that will help inform individual enterprise-wide cutback recommendations. Depending on the nature of the enterprise, examples of criteria could be:

• Can be implemented quickly
• Protects public safety
• Preserves critical human and financial assets
• Continues essential services and products
• Treats owners, shareholders, and employees equitably

These or other criteria can be left as a general list to inform individual straw votes or collectively ranked if that is useful.

8. Agree on the Total Amount of the Budget that must be reduced. Identify the total amount of money that needs to be cut from a budget and over a specified time frame.

9. Identify All Potential Cuts. On index cards, post-it notes, a whiteboard, or on a computer screen, write down each potential budget cut and the amount of its reduction value. Label each option with a letter. For example:

• Option A – Scheduled raises: (Savings: $36,300)
• Option B – Elimination of new, unfilled positions: (Savings: $170,500)
• Option C – Advertising and marketing: (Savings: $43, 900)
• Option D – Travel for client contact: (Savings: ($73,830)
• Option E – Elimination of last three hires: (Savings: $252,000)
• Option F – Training and conference: (Savings: $58,500)
• Option G – Early retirement payouts (net value): (Savings: $40,000)

The list can be as long as needed.

10. Engage in “Paired Comparison” Voting. Make the straw poll question explicit so everyone is continuously reminded of the objective. Write it on a white board where it will serve as a persistent reminder when the polling starts. An example might be, “Which budget cuts must be made now so that our long term position is preserved when recovery begins?”

Discuss each prospective budget cut so there is clarity and agreement about the choices and the dollars involved. While there are many different straw polling techniques, paired comparisons (sometimes also called “Structured Interpretive Modeling”) is one that we have found particularly effective for cutbacks. It works like this.

Begin comparing items two at a time in random pairings and vote on which one is more important. For example, which of these two is better to cut now:

Option E – Eliminate last three hires: $252,000.
Option B – Eliminate new, unfilled positions: $170,500.

If B is voted more preferable as a cut, place it on top of E. Now keep comparing all items two at a time until a hierarchy is achieved. At the end of the exercise, review the work done, thank them for their effort, and assure them of what next steps will ensue.

Last Thoughts

Cutback discussions are messy and uncomfortable. Inevitably, there will be blowback no matter what cuts are made. One way or another, however, this kind of thinking exercise must be done. The goal of a consultation like this is not “consensus.” It is achieving sufficient “consent” for leaders to lead.

One further thought. The executive in charge can lead these types of consultations but they sometimes run the risk of going off the rails for the wrong reasons: old baggage, distrust, jealousy, interpersonal disputes, excessive turf advocacy.

Sometimes it is useful to have someone independent from the specific enterprise to serve as facilitator or moderator. This also allows the senior leader to not be present or to simply sit, listen, observe, and learn.

Authors

Peter S. Adler served as President and CEO of The Keystone Center and has held executive positions with the Supreme Court of Hawai‘i and the Hawai‘i Justice Foundation.

Kem Lowry was Chair of the Department of Urban and Regional Affairs at the  University of Hawai‘i and served as Associate Dean of the College of Social Sciences.