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 The Business Realist

   A dose of reality for a saner workplace


Companies, and economies, cannot cost-cut their way to growth. Trimming expenditures may be worthy short-term fix, but the only way to grow is through investment.  Treating investments that offer real ROI as fat to be trimmed is the first step in a death spiral.

Starving to Health

Posted  on 7/30/10

Skeleton dressed as a ladyPerhaps, it's my fascination with fractals -- patterns that stay the same no matter what scale you are using, but I see a  pattern when it comes to starving yourself to health.

Let's start first with the individual and my ongoing diet and fitness analogy. If one finds oneself overweight and out-of-shape, the worst course of action to take is to go on a severe diet. Studies have shown that extreme dieting only deprives your body of needed nutrition and causes it to hold onto fat. Rather, lifestyle changes like starting an exercise program and eating better and, perhaps, eating less, are the only way to achieve long-term weight loss. Sometimes this requires an investment in a nutritionist or health club, but usually it's money well spent.

Similarly, given this economy, if a household suddenly finds that it has lost income due to lay-offs or other revenue decreases, the first reaction is to trim the household expenses. This is a good thing initially. Taking a look at spending to determine what's  unnecessary is an exercise we should all probably undertake more often.  The problem comes when investments get trimmed along with expenses, especially investments in yourself. Trimming your budget is never going to increase your revenues. The only way to earn more is to invest in yourself. This can take the form of professional resume writer, a career coach, professional certifications, skills training,  or joining a professional association. If you want to get a better job (or in this market, any job) you have to invest in yourself in order to make a difference. Taking on debt when future income is uncertain is a daunting prospect, but really the best time to take on debt is when future revenues are uncertain. You take on debt as an investment in securing future revenues.

Being the graduate of an elite and very expensive college, I am often asked by parents whose children were just accepted into an exclusive school, if it is worth the price. I always answer emphatically, "Yes!"  In their minds, they depict a massive debt accruing with student loans. Then they depict their children burdened with paying off these loans for the rest of their lives. What they don't understand is that you can grow your way out of debt. An average college graduate may get a starting salary of $30,000 and have a debt of about the same. That's not a lot of money to live on and pay off debt. Graduates of Ivy Leagues have a starting salary of around $120,000.  Let's say their debt is also 4 times greater at $120,000.  You don't need complicated math skills to see that the Ivy League graduate can pay off the debt much faster. Assuming that they only need $30,000 to live, they can pay it off in two years. In fact, getting into more debt by attending business or law school will result in even higher starting salaries and faster income growth. Simply put, these debts are not expenditures, but very profitable investments.

Companies often have the same belt-tightening mindset at the time when they most need to loosen the purse-strings. They lay-off the most expensive workers, forgetting that those are the people with the most skills and experience. People development, leadership, and other training programs are among the first to go, ironically, now that employees actually have the time to attend them. Consultants working on growth initiatives are replaced by those versed in slashing operations. With everyone focused on cost-cutting, revenue generation gets less attention, and, surprisingly, revenues dwindle even further spurring more cost-cutting. Employees that could be using the downturn to develop skills or concentrate on innovation and improvements are now paralyzed by fear of lay-offs into inaction. There's a huge risk that the company has entered a death spiral where there is no chance to grow revenues.

Worse, because every company is doing the same thing, employees, who are also consumers, stop consuming, adding to the economic downturn. With each wave of lay-offs, consumer confidence decreases.  Belt-tightening by banks and woefully misguided politicians only contribute to the lack of money, lack of investment, lack of development, and lack of economic recovery.  Investment in jobs, job training, education, new businesses and everything else could stem the tide, but fear of debt prevails over a proven method to combat recession, namely spending. Remember the dire consequences Hoover's fiscally responsible policies had on our economy - the Great Depression and the Hoovervilles.  Like our Harvard graduate, it is much easier to pay down debt when  your earnings, or GDP,  are growing. During the Clinton years the economic boom and budget surpluses paid down a big portion of our debt, and people were starting to wonder if treasury bonds were a thing of the past. Growing out of debt is the only viable option for our economy. Think of it as an investment in our country's future, like sending an entire generation to Harvard.  Sure, they'll have debts to pay down, but when you're earning hundreds of thousands of dollars, who cares? 

You can't starve yourself to health, only to death. 

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