The likelihood of an organisation undertaking cost cutting initiatives has increased by 74% since the global pandemic. At the same time, leaders are increasingly focused on ESG (environmental, social, and corporate governance) and wellbeing within their organisations.
The challenge is that these two areas tend to be at odds with one another – when cost reduction comes into play, organisations often de-prioritise the wellbeing and support for their people, customers, and supply chain, in favour of financial gains. However, these gains can be short-lived as decreases in workforce productivity, loss of customers and brand damage come into play. But ESG and cost reduction do not need to sit on opposing corners - these two agendas can complement one another in the attainment of strong financial performance and sustainable growth. For organisations to be truly ‘socially responsible’, they need to rethink the way they approach cost reduction.
To put this in practical terms, let’s explore this through the lens of three key areas of cost reduction: workforce, supply chain and customers.
Workforce downsizing is often a key part of cost reduction. However, the immediate cost savings from redundancies can be overshadowed by impacts on longer-term sustainability caused through weakened engagement, decreased productivity, and increased attrition (sometimes known as ‘survivor’s syndrome’). In fact, studies have shown that ‘survivors’, on average, suffer a 41% decline in job satisfaction, a 36% decline in commitment and a 20% decline in job performance.
This is not to say that redundancies shouldn’t be made, it’s to emphasize that there are interventions that leaders should put in place to better support their people through the process. Measures that organisations can implement include regular, authentic and consistent leadership communications, early engagement with employee groups to gain feedback on ways to move forward, and employee support packages, including practical career guidance and wellbeing workshops. Some companies’ redeployment efforts have included contacting industry peers or even setting up websites to raise the profile of the people being made redundant. This can significantly reduce the emotional and mental impact of workforce downsizing programmes on both leavers and ‘survivors’.
There is also a broader consideration here - the employment rate for people from BAME backgrounds in the UK during the COVID-19 pandemic slumped by 5.3% compared to a 0.2% decrease for white workers. Similarly, the pandemic has led to more women losing their jobs than men. Therefore, for the ‘Social’ considerations of ESG, there is a clear case for organisations to be more considerate in the way they design and deliver redundancies.
2. Supply Chain
The impact on suppliers of cost cutting programmes can lead to job losses, decreased wages, or even an increase in negative labour practices, which is often felt most acutely in developing countries where the knock-on effect on workers’ health, mental and physical wellbeing and socio-economic status can be quite extreme. There has been speculation that the cutting of supplier contracts throughout the pandemic has reversed the last decade of progress in terms of global poverty reduction. The negative impacts can be far-reaching.
Again, there are measures leaders can put in place to mitigate these impacts - recommending supply chain partners to peers in the industry, providing skills development support for contractors, and gradually tapering contracts to give suppliers enough time to create other business partnerships. These help to ease the shock and negative impacts on individuals, communities, and economies. As with initiatives that support the workforce through the process, the key is for organisations to engage and communicate with their suppliers early in the process and demonstrate willingness to work with them to identify mitigating actions for their business and people.
For organisations to truly embed ESG practices, they need to be aware of their impact on customers when cutting costs – and this is particularly relevant for the more vulnerable customer groups, for example banks, as they to move away from face-to-face to digital banking. Whilst many customers have taken to this comfortably, niche customer groups, including the elderly, tech illiterate or other vulnerable groups, have found it difficult to manage their finances digitally and adapt to the new ways of interfacing with banks. Similar to the workforce and supply chain impacts, a customers’ mental and physical wellbeing can be impacted negatively by cost-cutting programmes, and it is an organisation’s responsibility to respond better to this.
In practical terms, this means mapping out customer experience journeys for different customer groups to understand the impact. Where the impact is more severe, additional support and communication should be put in place and the process should be slowed to ease the impact and allow more time for customers to adapt.
In conclusion, it has never been as important as it is today for organisations to approach cost reduction with a greater understanding of their impact on society. ESG has become a standing agenda item on Board meetings, as has cost reduction. Therefore, organisations must consider the importance and related business benefits of approaching cost reduction in a socially responsible and ethical way; not only because it’s the right thing to do for their people, suppliers and customers, but also because of the competitive advantages that can follow through an enhanced company reputation and increased employee engagement.
Please reach out to the authors if you are interested in discussing this topic further.
But ESG and cost reduction do not need to sit on opposing corners - these two agendas can complement one another in the attainment of strong financial performance and sustainable growth.