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Leadership Powered by Common Sense | Episode 493 | Guest: Duane Deason
Introduction
Hello again everyone. Doug Thorpe here. And this is Leadership Powered by Common Sense. Have you ever struggled with administering a cost cutting measure? Well, today we’re going to dive into that topic. It’s a sensitive one — a tough one to manage well and has a lot of hair on it. So my guest is going to help us unpack that a good bit. His name is Duane Deason. Duane, welcome to the show.
Doug, thank you for having me.
Meet the Guest: Duane Deason
Yeah, it is a pleasure. Give us a quick flyover of your journey that got you into this focus area.
Absolutely. So I started off doing the CPA, big accounting firm type of thing, and after a few years of that, I started my own business at 27 helping companies through financial transactions, doing things like IPOs, M&A, type of activity. So it was exciting and good work.
I enjoyed that, sold that company in my early 30s, and I was flying pretty high and decided I would go take a CFO position at one of my former clients that had done an IPO. They had lots of cash, but the IPO market had dried up, the economy had turned. It was after the .com bubble burst and their costs could not be justified based on their growth and revenue, and they weren’t going to get any more funding from the market in that environment.
And so they knew that they had probably less than a year to survive unless something dramatic was done. And so they asked me to come on board and see if I could right that ship — and right it, I did. We were able to save the company and bring it from a high burn rate to a break-even cash flow. We were able to sell the company during a very difficult time, and I felt like I saved it from bankruptcy. And it changed my career, changed my perspective.
I realized that most companies don’t manage their costs very well and don’t know how to make their company operate more efficiently or be more effective. And so I decided at that point I was going to dedicate my career to that. I’ve gone from company to company, helping them better manage costs, become more efficient. And I started noticing some patterns.
One of the most disturbing patterns was that companies have a tendency — because they don’t manage costs very well — to lay off employees as almost their first cost-cutting effort. And it really hurts the company. It hurts employees. I argue it hurts customers and shareholders. And so I wanted to help companies cost cut correctly and with more thought and more targeting.
I also noticed that companies tend to wait too long, and they come to me a little bit late in the whole process. At that point, there are fewer options. And the third thing I found that was very disturbing is that I could do a project and within 2 or 3 years, I could almost go back to that same company and do the same project all over again.
It bothered me that the lessons I was teaching weren’t sticking. And so I decided that I was going to try to do more advising and teaching — to fish rather than giving them the fish. I wrote a book on how to control costs. I do more advisory type of work on that, trying to teach them and make them partners in that effort with the hopes that it will last longer afterwards.
The Leadership Factor in Cost Management
You know, in some of your material that you had sent me, you did reference the significant role that leadership plays in effective cost management. And I could not agree more with that idea.
I’ve often referenced in my career journey — I went to work for a large regional bank when I got out of the military. What I didn’t know when I joined that company was they were a very unique, almost one-of-a-kind in the leadership discipline that was there about planning and budgeting and subsequent cost control. And I just, as a young man going into that, I just thought that’s how all banks ran.
And it was many years later that I realized, nay nay — that’s not how everybody operates. It was a truly unique environment. And quite honestly, some of the people that joined the company and were exposed to that discipline and rigor of how we did budget and how we managed costs didn’t suffer it long. They wanted a little more free-wheeling opportunity and felt it was overly restrictive. But then there were guys like me that enjoyed it — and maybe it was my military rigor that was part of the equation, I don’t know — but it proved very effective.
And the big bottom line: in the 20 years I was with that organization, we had 64 consecutive quarters of earnings growth. And that was in up and down markets — oil booms, oil busts, real estate, etc. It was that rigor and discipline of how we did our plan. So I kind of got baptized in the right way to do things early on.
And it’s hard. You go into a company, particularly one that’s more middle market, where the founder has kind of run everything and they’ve got their own ideas on what should and should not be in that business. And they don’t want to hear a lot about cutting costs and doing other things.
I love that story of your first experience with the bank. Because one of the issues I find is that most people haven’t had that experience. And so what happens is that you end up hiring employees that have not had that kind of background of cost discipline — and they’re not even good at managing their own money.
And what ends up happening — there’s that old saying that you should treat the company’s money like it’s your own. Well, you better be careful, because most of those employees aren’t treating their own money very well. So companies aren’t teaching good habits to their employees.
And to tailor off a little bit of what you were saying — more common is that entrepreneur that started the company: great visionary, great drive. They’re usually good with their product and customer relationships. They have a lot to offer. But the challenge as they get into hiring other management is they tend to hire other like-minded individuals — people that are visionaries and not necessarily the doers.
They don’t balance the company with having a certain amount of that vision and growth alongside balanced leadership that is also able to prepare for crisis, to make sure that the company has a strong platform in order to develop when it grows.
The Culture of Cost: What Leaders Inadvertently Teach
I find that companies are not good at that. And part of that starts with leadership. They have to recognize where their strengths and weaknesses are — and that can be an uncomfortable conversation that some of them don’t want to have.
One of my clients used to fly all their employees into Las Vegas for a once-a-year boondoggle — a rally with big bands and entertainment, really rolling out the red carpet for employees.
The problem with that is: what message does that send to employees? Does it send the message that they better be efficient? Or does it send the message that the company is wealthy and doesn’t have to watch costs? Unfortunately, I would argue it’s the latter. And they take that back and how they do their day-to-day business — they’re not particularly careful.
Why Headcount Is Usually the Wrong First Cut
Yeah. You know, one of the big areas, as you alluded to, is the notion that we’re going to cut headcount. They’re going to go on a cost-cutting effort and the first thing that goes is headcount. On one hand you can understand where that mindset comes from, because if you look at your financial reports, inevitably personnel is one of the largest categories of spend in just about any business.
And I think of things like in larger companies — they immediately cut areas like HR personnel, they cut training budgets, they cut training staff. And it’s like — so you’re not going to develop your people at all?
You know, there was one large company that no longer exists, and I’m not going to name names, but they had a tradition — they were a manufacturing group — of eliminating their Q&A team when things got tight. And every time they did that, product delivery suffered. They weren’t getting the same quality. So out of sheer necessity, they’d have to hire all those people back. And they’d go at it again for another 18 to 24 months — rinse and repeat.
Yeah. And without naming your client, I would tell you that you don’t have to — because there are a lot of companies that do it. What they do is they’re given a budget and told to cut by 10%. Most managers — you might have hired a technology person because they were great at technology, not because they were good at cutting costs. They don’t know what to do, and they can’t really cut those costs. It’s not really their sweet spot.
And they’re usually told to do it very quickly. So headcount becomes almost the only answer they can come up with. And it almost starts a little bit of a death spiral — they’re operating less efficiently and less effectively, their financial results reflect that, they get another budget cut, which leads to more layoffs, which leads again to poorer performance.
I’m not one to say don’t cut headcount. What I advocate for is that headcount should be down the road. If you have the time, fix the company’s inefficiencies first. Look at all of how you’re spending money, where you want to focus your attention, what is important to you as a company. Write all those things, and then look and say — okay, what is my headcount to match that? What do I need? And then you’re cutting your headcount down to what you need and what is right for the organization, not some arbitrary 10% off the top.
A Real-World Story: When Cutting the Line of Business Made More Sense
As you were saying that, I was reminded of a situation in my consulting days. I was called into a company — national, publicly traded — and one of their divisions was suffering a bit. What I discovered quickly was they had one whole line of business in this division that was net zero. The revenue they generated for the service they were providing barely gave them break even.
And I went to management and I said, my first recommendation is to shut down that line. You don’t need it. It doesn’t have residual value in the rest of your business model. It’s just a convenience that you somehow inherited and grew — but grew for no gain.
They said, oh no, no, we can’t do that. Let’s look at headcount across the whole division. Okay, so we did the classic drill with HR. We created criteria for how we were going to pick who was going to go and who was going to stay. It required a cut of something like 40 or 50 people out of a 300-million group.
We had the list — stack and rank ordered by the HR criteria they felt they could defend. And we went to the division president. Said, here’s your list, here’s your cut line. Take a look. And immediately the president said, I can’t lose him, I can’t let her go, I can’t do this, I can’t do that — and had a story for everybody on that list.
At that point, I went back to management and I said: okay, you have a choice. Either you force this cut line on this president, or you cut that division. It’s pretty black and white. And the final decision was to cut that one line of business. And actually, they could absorb a couple of those people into the rest of the organization, still achieve their cut line goals, and retain some otherwise good people. So it was kind of a win-win in the end.
It does raise an important point — when you’re going to rob the parts of the business that are doing well in order to fund a break-even line that’s not core to your mission or product set, that’s something people ought to think about.
And it certainly highlights two issues: if you’re going to cut headcount, you have to decide — do you actually need that person and are they required to run your business, or are they really overhead and wait? Sometimes you get into nuances where they’re nice-to-haves. But if you’re in a financially challenging situation, they have to be must-haves.
The Leadership Mindset That Makes or Breaks These Initiatives
So let’s pivot just a little bit. Let’s get into the leadership mindset that either makes or breaks these kinds of initiatives. Tell me what your observations have been about the leaders who can effectively launch one of these measures — without tanking the morale, the innovation, and the spirit of the whole organization.
When it is very hard for management — if they are a very growth-oriented, innovative, “damn the torpedoes, full steam ahead” type of leadership — to all of a sudden pivot and become a management team that focuses on efficiency. I find that very hard to do that transition. They need to make sure they’ve hired leadership that can help them navigate that.
So I think the first thing leadership has to do is determine: do they have the right team to effectively implement that?
And then they need to look across the organization and say: where are our costs being managed today? One of the biggest issues I find is that cost management is being dispersed throughout the organization. The person deciding compensation levels is usually someone within the chief people officer or HR group — and you usually don’t hire somebody in HR because they’re great at being tough on salaries and compensation.
So you end up putting certain cost functions in organizations that aren’t necessarily focused on that function or very good at it. And you have inconsistency throughout the organization.
Building an Internal Cost Management Center
You really have to reach across the organization and say: we’re going to consolidate all the different functions under a cost management center so that we have uniform cost control and practices that apply to the whole organization.
When companies like myself get called in, that’s the first thing we do — we put together an external cost management center. We sit in a conference room, collect all the data from all the different groups, and work through it together. What companies need to do is have their own internal cost management center so that they learn to do that themselves.
Think of it this way — you have one person in charge of all building revenue for the company. You need to have one person essentially in charge of managing the company’s costs. And you might think, isn’t that the CFO? But most CFOs don’t grow up that way.
Most CFOs come from accounting — they’re great at financial statements, which are retrospective looks at how a company performed. They’ve never really managed costs before. And some come from Wall Street, where they’re great dealmakers, but again, they’ve never really managed a company and its costs. So you rarely have a CFO that came up from a background that helps manage costs.
The Profit Planning Model: Doug’s Banking Experience
Yeah. Again, I go back to my banking example. We had just such an internal team. It did roll up and report to the CFO. But the team — we called it the Profit Planning Group — had a rigorous review cycle for all of our major costing efforts.
We could tell you to the umpteenth decimal how much it cost us to process a check, take a deposit at the teller line, or fund a loan. We had all the key elements of the business broken down into identifiable units that we tracked, and we paid attention to changes in unit cost for those items.
And more importantly, we even pushed it out to a large digitized model of customer profitability. We could pull up Duane Deason’s records and tell you — based on the allocation of transactional volumes going through your account versus the kind and nature of the accounts you had — whether you were contributing to our profitability or not.
When you came asking for a big loan for your business, we factored that into the model. It might not have driven us to say no — but it might have driven us to reprice the offer we made to you, to recapture some of the bleed we might have been having on your account.
I think that makes a lot of sense. And it brings up a secondary issue. What I see a lot of companies do is they don’t have a shortage of that information — maybe not down to the level of detail you’re talking about, but most of them have decent KPIs and tracking information.
What I think they lack is accountability — where an employee takes that information and now you say, you have to do something with this, and this is the expectation. And there’s not the same accountability that I would say existed a couple of decades ago, when companies were taking cost management much more seriously and really putting pressure on employees — saying you have to do better, you have to continue to improve this organization or we’ll find someone else who can.
The Accountability Problem
I think some of that’s been lost more recently. And we do need to get back to the point where expectations are laid out, consequences for not meeting expectations exist, and there is tracking of projects and efforts to say: we funded this for X dollars and we expected an ROI of Y — and we didn’t get there. Why not?
Sometimes they just finish the project and say, wow, we finished the project, that’s great. And no one goes back to ask: what was the original ROI on that? Did we win on this effort? What do we learn if we didn’t?
I would tend to agree with you. And again, not to beat it to death — but in that banking model, there was accountability. There was a monthly report. If you were a cost center owner in that organization, you had a box in this report that showed you your prior month and your year-to-date number.
I’m dating myself — this was back in the day. We didn’t have fancy color graphs or anything. It was a black-and-white chart. Half of the box was black if you were underwater for the month, or white if you were operating well. And it became a bit of a contest and a pride thing — you didn’t want to have an all-black box on that chart.
And you took the discipline to do what you had to do to right your own ship. As everything aggregated up — when we got to about that seventh or eighth quarter of earnings growth — everybody said, wait a minute, we’re on a roll here. Let’s not be the one that drags it down. And it became a living, breathing flywheel effect. We had this giant organization in motion, all going in that profitability direction.
Yeah. That’s fantastic. Gets me teary-eyed. I really wish I had worked with this bank at one point.
How the .com Era Shifted the Rules — Permanently
But I think what happened is — back in the early 90s and before, that philosophy of running efficiently, being careful with the company’s money, making sure you focused on returning profits to shareholders — that was much stronger. Then the .com started, and it was the first time the models were almost like the first time that it was much more focused on how quickly could you grow. Forget profitability. It’s about market share, it’s about expansion.
And the stock market and the economy was flying high. Yes, the .com bubble burst. You would think that meant we reverted back to the old ways. But in many ways we kept that philosophy — particularly in the US — that it’s really about growth and market share, and the market rewards you for that less on profitability.
You had many companies like Amazon that for decades weren’t very profitable, and yet they could get all the funding they ever wanted as long as revenue was growing. Some of that has shifted, almost in a permanent way.
And there’s a misnomer that by controlling costs you are slowing growth. I will argue that an efficient company grows much faster, more successfully, more wisely than just throwing money at the effort to grow and expand.
Margin Is the Engine of Growth
Well, I was going to say on that note — and I know this is getting a little deep for some of our folks out there — but the whole idea of controlling profitability is about margin. For all the work you’re doing, if your revenue doesn’t exceed your cost for what you’re doing, you have no margin or you have a negative margin. And margin is what does produce ultimately the disposable cash to help grow the business.
So if your industry is operating at an average of about 10 to 15% margin and yours is only five — you’ve got a long way to go. And a proven opportunity to increase that margin. Because everybody else in the industry is getting that 10 to 15%. And if you can’t make your adjustments to get up there, you’re not going to have the cash you need to do some growth and expansion.
Yeah, I think the competition is eventually going to overwhelm you. If your strategy is to be less profitable in the long run, that’s going to be more and more difficult. Because competitors can squeeze you — adjust their prices and lower your margins even more. And now you can’t even stay in business.
It’s capitalism — it’s a little rough out there. So if you’re going to be a company that’s non-competitive, you’re not going to last.
What It Takes to Build a Lean, Efficient Organization
So we talked about leadership needing to hire the right people that have a mindset of accountability. What else in your observation, Duane, is necessary to make this work?
So they have to be committed — committed to being that lean and efficient organization. Once you have a cost management center applying efficiency throughout the organization, you run an entire effort to constantly ask: how could we be running better and more efficiently? Not only how can we grow faster — that’s great too — but also, how could we be doing things more efficiently and running a stronger platform?
And I use the startup comparison: why are they so much more innovative than these big behemoth companies? Why are they so dangerous to these big companies when the big companies can throw R&D money at problems far beyond what a small startup can do?
It’s because they operate lean and effectively. That actually enhances their innovation. They can think outside the box. They don’t have all the bloat that a larger organization has.
If you took that same team working within a startup that was producing great innovation and moved them to one of those big behemoth companies and threw tons of dollars at them — their productivity would plummet, their innovation level would plummet. Because you changed the formula that made them run efficiently and effectively.
The Hidden Bloat in Middle and Upper Management
Right. Well, I think it’s true that companies — particularly in more direct manufacturing, for instance — there’s a lot of talk about process improvement and KPIs. But if the company is big enough, chances are they’ve got some bloat in the middle and upper management that they haven’t addressed. They’ve focused a lot of energy out on that shop floor. But they haven’t thought about their own game.
And I was told an interesting story a number of years ago — The Home Depot had a new CEO come in, did a study, and realized there were 60-some odd officers at headquarters that nobody could identify what they really did.
Oh my gosh. Yeah.
And the decision was made — that whole layer of whatever that job class was — it was eliminated. And the company didn’t skip one beat whatsoever in terms of the rest of the process to run the business.
And they might have done even better than not skip a beat. They might have actually become more efficient, because the line of communication between the floor level and the top leadership is now one less layer. Those are the type of things you look for — opportunities to make the company more efficient. And there’s never a shortage.
Organizational Bloat Is Evolutionary — And Preventable
Well, I think it highlights the idea that as the company does in fact grow and become a much larger enterprise-scale business, there’s an inevitable kind of almost evolutionary bloat that starts to occur. Some problem comes up, so they hire a person to deal with that problem. And then that problem gets resolved and they don’t think about repurposing that person.
They just kind of let them park down the hall. And it could be years before they ever ask the question: why is George still here? What’s he doing?
And more so, there’s an inevitable overall process impact as well. We start layering levels of approval and reporting and communication. And you know, it creates more meetings — which are not efficient in general. And that was one of the rigors that Bezos implemented at Amazon. He had the one-pizza rule: if you can’t feed everybody in the room with one pizza, you’ve got too many people in the room. And that alone added some level of efficiency to what they were trying to do, just in terms of man hours wasted in meetings.
Yeah. And that’s what you really need from a leader. There’s no shortage of Jeff Bezos being a great visionary. But he also tells you that he cares about efficiency and productivity. And if you can have leadership that has both of those sides — I tend to find that leadership is usually more single-dimension, where they are really good at something and not that strong at something else.
But if you’re willing to listen to people who don’t have your same skill set, and you listen to those advisors, then I think you can be a very powerful management team.
Closing Thoughts
Yeah. Well, Duane, that’s a good point to wrap up on here. Tell people the best way to get in touch with you.
I have a website where I keep a blog. It’s Efficacy Group — that’s efficacygroup.com. On there I have a podcast where I talk particularly focused on cost controls and different people in that industry, giving advice to people who are interested. I also have some articles and other ways to get in touch with me. And there, it can lead you to my book — Operationally Spelled — which focuses on managing costs but increasing performance. If you’re interested in visiting that, I’d love to have you and love to hear from you.
Great. Well, as always, folks, we’re going to have those links in the show notes. So hop down when you get a chance and check that out. One last time, Duane — thank you. Really appreciate your time here.
This has been wonderful.
And with that, folks, we’re going to put a wrap on this. I do like to remind you that we have a video version of this show over on the YouTube channel by the same name — Leadership Powered by Common Sense.
Check out our archives. We’re rapidly approaching episode number 500, so there’s a lot of content out there. And be sure to check it out. Go out there. Make it a great day.
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