Monday, December 22, 2008

Cost/Benefit Analysis

Companies are facing some interesting choices as they cope with the economic downturn, and these hard decisions call for careful cost/benefit analysis. Some retailers have expanded their hours dramatically, even staying open 24 hours, to attract shoppers just before Christmas. The question, of course, is whether the additional expenses incurred by remaining open those extra hours will pay off in terms of incremental revenues. Similarly, we have some firms engaging in substantial layoffs, while others are eschewing layoffs in favor of four-day workweeks. Clearly, the four-day workweek means you retain talented, well-trained people, and thus, you can scale back up quickly when the economy rebounds. You also avoid paying the severance that might be associated with layoffs. However, you typically have to continue paying all these employees' benefits. Thus, the fully-loaded hourly wage rate for these workers rises substantially under the four-day workweek scenario. If the firm chooses the layoff strategy, they incur some severance expenses, but they save not only the hourly wage rate but also the benefit expenditures. The challenge, however, will be the expenses down the road that will be associated with hiring and training new employees who might have to be hired as the economy comes back. To me, getting these cost-benefit analyses right are essential for any firm hoping to navigate this downturn successfully. The answer won't be the same for every firm; a good cost-benefit analysis will take into consideration the unique aspects of a particular business model. Companies have to think carefully about their specific workforce's characteristics as they make this type of decision. Similarly, retailers have to think about their particular customers as they consider the decision to expand shopping hours substantially in the final days before Christmas.