From: http://www.bizjournals.com/

Question

Our company performed very well this year. But now — during the holidays! — the CEO is telling us to cut costs by 5 percent in next year’s budget.

How should I explain to my employees why we are cutting costs after a banner year of results? It doesn’t make sense to me, and I feel like Scrooge!

Answer

When budget cuts are directed, it’s natural to feel like Scrooge, the infamous miser from the Charles Dickens classic, A Christmas Carol. Try to keep in mind the promise of the redeemed Scrooge: “I will honor Christmas in my heart, and try to keep it all the year. I will live in the Past, the Present, and the Future. The Spirits of all Three shall strive within me. I will not shut out the lessons that they teach!”

Most CEOs learn from the past and celebrate the wins in thepresent. But the best CEOs make decisions and set priorities based on what they believe will happen in the future.

As a leader it’s your duty to make sense of company mandates for your employees. Delivering difficult messages about cost cutting during the Christmas season is not easy. So before you communicate to your team about the cuts, take the time to understand why they are being directed, and what should be said.

Assuming your CEO is competent (and not an unredeemed Scrooge), several reasons would justify the cost-cutting:

1. Markets: The market may be declining in size. While employees tend to measure their performance against the prior year, top CEOs measure performance against the market potential in the future and the capacity of their organization to respond to it. Depending on the investment time horizon, excess capacity must either be absorbed through growth or cut to avoid lower profits or losses. For example, after several years of growth, analysts expect the mortgage market to decline next year due to a combination of factors, such as rising interest rates and flat wage growth.
2. Expenses: Perhaps free cash is being spent, rather than invested. When businesses are making money, managers have a tendency to spend the profits on non-value added projects or activities that do not provide a return above the risk level of the business.
3. Value: Valuation may be an issue. The board of directors may be putting the business up for sale at its peak value. To maximize value further, every dollar saved generates a multiplier on the value of the business.
4. Investments: There may be a better way to use or invest the company’s profits. Possibly your business is treated as a cash cow and is being milked for all of its profits to be deployed elsewhere.

These are all generally good reasons for cutting costs.

There are also bad reasons for cutting costs. Your CEO may have failed to define a clear and compelling direction for the organization’s future to shareholders. In this situation, a competent board of directors identifies the lack of vibrant leadership as a sign of coasting on the past and status-quo thinking. Thus, a short-term focus on cutting costs is invoked to shake things up, reveal hidden waste and stay competitive.

Or your CEO may be risk averse, unable to see future opportunities beyond the success of the current year. Cost cutting sometimes comes out of a miserly view that sees the present success as unlikely to continue.

Unfortunately, cutting costs often includes reducing staff. Nobody likes doing a layoff before Christmas. It leaves employees and managers with survivor’s guilt during a time that is supposed to be filled with joy, especially for children. But the alternative of waiting to communicate these decisions (which are beyond your control) until after the holidays often makes things worse for the affected employees and their families. They may end up saddled with more debt and expenses than they might have incurred had they known sooner.

While time is of the essence, employ a constructive path of inquiry to discover the reasons behind your CEO’s cost-cutting mandate. Ask questions. Your human resources department ought to be able to help too. Then, with the information you obtain, seek out a leader you trust to help formulate good answers.

Once you’ve made sense of things for yourself, you’ll be able to communicate more effectively with your employees. They won’t expect you to know everything, but they will expect you to share what information is available to you. It’s not a pleasant task, but they’ll appreciate your efforts to explain why the cost cutting is occurring and how it will affect them, even during the holidays.