Payroll cuts pose problems


You're looking for improved profitability but could end up with high turnover and service breakdowns.

Have you ever been tempted to skimp on payroll—either by hiring fewer employees than needed or hiring them as cheaply as possible? Leonard Schlesinger and James Heskett capture the potential implications of such a cost-containment strategy in what they term the "cycle of failure." ("Breaking the Cycle of Failure in Services," MIT Sloan Management Review, Spring 1991)

The consequences of this strategy: stressed employees who lack the time and incentive to properly address client concerns and disgruntled employees who feel underpaid and unappreciated. The result is low-quality service and high turnover.

Not surprisingly, clients become dissatisfied with the poor service they receive. They fail to develop loyalty to the practice and turn over as rapidly as the staff.

Management teams justify these actions, say Schlesinger and Heskett, by claiming, "To get good people would cost too much and you can't pass on these cost increases to clients," or "High turnover is simply an inevitable part of our business. You've got to learn to live with it."

But Schlesinger and Heskett say if you adopt this philosophy, you've failed to consider three consequences: the cost of constant recruiting, hiring, and training; the lower productivity of inexperienced new employees; and the time, effort, and expense of constantly attracting new clients.

You also need to consider two revenue variables: future revenue streams that might have continued for years but are lost when clients leave the practice, and potential income from prospective clients turned off by negative word of mouth.

Reality check: If employees feel overworked, unappreciated, or underpaid, they're unlikely to be highly productive or offer good service. And that spells disaster for your practice.

Bob Levoy

Veterinary Economics Editorial Advisory Board member Bob Levoy is a speaker based in Roslyn, N.Y., who focuses on profitability and practice growth, and the author of 101 Secrets of a High-Performance Veterinary Practice (Veterinary Medicine Publishing Co., 1996).

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