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Faced with the different challenges in the business world today, many businesses resort to cost cutting as among the most popular solutions to problems that causes business' financial declines and failures. Cost cutting, a term used in the process of cutting back expenses in an aim to save assets, particularly money, is intended to help in picking up or catching up from the economic losses that an organization had experienced. According to Derek F. Martin, in his article Cutting Costs Without Losing Your Shirt,

Downturn, economic slump, or recession, whatever you call it the U.S. economy has seen a significant reduction of non-critical purchases across almost every sector.

There are many ways in which cost cutting is implemented by businesses. Most of which are perceived as strategies in countering economic pressures and challenges. Cost cutting is always seen as a means of reducing expenses and focusing on the maintenance of necessities, particularly assets, for future use. In cost cutting, it is the end result of saving finances that is most of the time seen by organizations, believing that whatever they save add up to the assets of the company. However, in many cases, one question always arises when cost reduction is implemented within a business organization. That is, whether cost cutting is really effective or not.

A number of researches and studies, focusing on the effects of cost cutting, reveal that cost cutting jeopardizes a business more than saving it from the financial and economic problems that an organization currently experiences. Oftentimes, the results of cost cutting are sarcastically referred to as "the cost of cost cutting" where the solution that is meant to cut expenses unfortunately brought more problems and costly expenses, if not more losses, to companies and organizations. In his article "The Cost of Cutting Cost," John Eckhouse (2002) indicates the following as a result of a survey studying the effects of cost cutting. Eckhouse reveals that,

An unyielding 11% insisted most of the cutting was flat wrong. That raises the question about the true value of the ax-wielding that goes on today. Are you delicately pruning pockets of fat or slicing into your company's flesh, potentially damaging a core competency?"

There are many strategies found by many organizations during implementation of cost cutting. Apparent to employees though, based from surveys conducted in some organizations, the strategies used by the company's management are not efficient. In that, cost cutting oftentimes serves as burdens to employees whereby they are negatively implicated by the different areas of cost reduction. Moreover, it is not only the employees who are seeing the negative effects of ineffective cost cuttings but the customers and clients of organizations as well.

While there are also indications of several benefits derived from cost cutting, issues on its general effects to organizations remain a subject that requires thorough analysis and study. Is cost cutting really cutting costs? This is the foremost question that companies and organizations that are implementing, or are planning to implement, cost cutting must carefully study. Otherwise, the term "cost cutting" may be equivalent to doubling the costs, as how some failed cost cuttings have caused.

Businesses and organizations use cost cutting because of several reasons, most of which relate to low economic or financial conditions. The prominence of cost cutting is seen within any type of industry, in that whenever there is a business slump or economic downturn, cost cutting is almost always one of the "catching up" strategies that many businesses consider. Cost cutting, as believed by some organizations, reduces expenses and saves business assets. Perhaps, this became a common belief because of the facade that cost cutting poses. That is, to merely cut or lessen expenses.

However, as with any other strategies relating to business managements, procedures, and strategies, it is never unavoidable that issues arise concerning effectiveness and usefulness. After all, a business is technically all about the right ways and workarounds on doing things to achieve success. Otherwise, without critical analysis of business activities and strategies, or without the delivery of other business beliefs and philosophies, a business' status will remain as nothing but running in a stagnant or crawling condition. In view of this, it is important to study and analyze issues concerning the real effects of cost cutting, particularly the revelations of researches and studies that cost cutting doesn't really cut costs. Rather, cost cutting just adds up to the burden of the employers and employees.

From the problem of whether cost cutting is effective or not, there lies several other problems. One is whether businesses should consider or not consider cost cutting. The following sections of this research will aim to explore cost cutting and its effects to businesses and organizations.

Context of the Problem

The history of cost-cutting may have started centuries ago, yet may be unknown to business history because of the absence of the different management strategies that we've known today. Even based in our personal experiences, we also do some cost-cuttings whenever there is a need to save for our future needs. But, if cost-cutting is a successful strategy when it comes to our personal needs, its relevance and complexity is different when it comes to implementing cost cutting in a business.

Almost every business has its own history of cost cutting. Cost cutting happens during times of financial crisis, having the need to tighten expenditures and the need to conserve and save. However, it is but normal that employees wonder whether cost cutting does something good to an organization. Such doubt occurs because of the fact that if there are people who know more about the impact and effect of cost cutting, it would be the employees who see almost everything that are implicated by cost cutting. Moreover, it is the employees who are directly affected by cost cutting. Thus, the employees are the people who can accurately evaluate the effectiveness of cost cutting. According to the National Tertiary Education online, cost cutting bullies employees.

NTEU notes that, in recent years, workplaces have been under increased pressure due to the effects of economic rationalism. Workplaces have had to cope with sometimes harsh cost-cutting and more and more employees are held to account for each dollar spent. In this economic climate, the phenomenon of workplace bullying can be seen as the result of work pressure boiling to the surface.

Cost cutting has been an issue in terms of business management strategies because of the lack of positive results that it proves to employees. To employers, the negative outcomes may be visible but were made invisible to the employees. Hence, in view of this, it is important that researches and studies that analyze the effects of cost cutting be conducted for the benefit of many businesses as well as for the benefit of the workforce. This will be significant as issues regarding the drawbacks of cost cutting asserts that cost cutting negatively affect the employees more than how it brings positive outcomes that are expected from it.

Many businesses sometimes do not see the negative effects of cost cutting. Hence, up to these days when a wide array of products of technology exists to help man perform tasks in the most fastest, easiest, and convenient manner, supposed to provide companies and its management with better ideas that solve financial or economic problems, cost cutting is unfortunately still considered as among the solutions to economic slumps. More unfortunate is that cost cutting is wrongly implemented, hence the impact to a business, to the employees, and down to the line of the business clients and customers, serve as among the factors that cause businesses with more financial failures instead of achieving the goal of saving from crisis.

Some employees believe that cost-cutting is a problem that is mistakenly considered by businesses as a solution. Because of this, cost cutting as a framework solution in uplifting from business crisis continues to be an issue. As indicated by Kaas and Ohl (2002),

In a new twist to best practice, several high-performing companies we studied are taking an unusually ambitious approach to reducing their operating costs.

Questions regarding the effectiveness of cost cutting present guidelines to researches and studies, particularly to the study of effective business management, in analyzing the reality of cost cutting as well as in investigating the possible solutions which businesses must consider other than cost cutting. Some of these questions are as follows.

What are the effects and outcome of cost cutting? What are the risks and benefits?

Does cost cutting result more to positive end than to negative end?

How positive does cost cutting impact a business, its employees, and its customers and clients?

What are the costs of cost cutting?

From these sample questions, a study on cost cutting can give light to answers whether cost cutting is an ideal solution to financial crisis.

There are a number of alternative solutions, in fact should be considered as foremost solutions than cost cutting, that several researches and studies and even business analysts suggest to organizations before considering cost cutting.

On the other hand, it is not always about the negative effects of cost cutting that is important to focus on during the analysis of whether the strategy is beneficial or more costly. There are researches and studies that also reveal the positive sides of cost cutting. The problem being focused in this paper, however, is the study and analysis of how much benefits can cost cutting really bring to an organization's crisis and whether cost cutting is a smart strategy for companies to take.

Research Questions and Hypothesis

This study will focus on the research and study of the effectiveness of cost reduction as a crisis management solution. Immediate resort to cost reduction has been a habit for many businesses every time crises, such as economic downturns, labor disputes, and many others, hit the stability of a business' operation. Dealing with the pressures of such problems should be considered critical hence diverting to solutions must be made with thorough analysis and study. In view of this, this paper aims to analyze and study whether cost reduction/cutting is an efficient strategy. It is a fact that cost cutting is always in the top ten of the list of crisis management solutions that most companies consider. Despite of this, however, it is hypothesized that cost cutting, almost always, is not regarded as a 100% ideal crisis management strategy. There are many reasons found to this which will be among the focus of this paper to determine whether cost cutting is effective or not. For a bird's eye view, one reason found in the issue of cost cutting being inefficient is due to lack of effective implementation processes.

To determine the reality of cost cutting as implemented by organizations to solve financial crises, and to serve as guides in the objective study of this paper, the following research questions will be used.

What are the effects and outcome of cost cutting? What are the risks and benefits?

Does cost cutting result to more positive end than negative end?

How positive/negative does cost cutting impact a business, its employees, and its customers and clients?

What are the costs of cost cutting?

Significance of the Study

This study aims to provide useful information about cost cutting strategy. This study's significance lies on the objective that organizations and businesses will be enlightened on the pros and cons as well as the do's and don't(s) of cost cutting. From an analysis of the advantages and disadvantages of cost cutting, it is aimed that companies will be provided with idea as to when, where, and how, cost cutting can be ineffective or effective.

In today's increasing competition in both the local and international market, it is important that organizations know the right strategies and techniques in both situations of economic upturns and downturns. Hence, in view of this paper's subject, its significance can be seen in the provision of important information about one of the most common management crisis solutions and among the contentious business policies during crisis - the cost cutting/reduction.

Moreover, the information gathered by this study can be significant to the peaceful condition of an organization's work environment. Because of the information that this paper aims to provide to organizations and employees, particularly about the reasons when cost cutting is effective and when it becomes ineffective, situations of crisis can be well managed, thus resulting to a satisfactory work condition for both the employers and the employees. Among the organization activities where this study can be significant in relation to cost cutting are as follows (CCRBA online).

Adjusting staffing levels;

Optimizing procurement efficiency;

Identifying discretionary activities;

Minimizing materials consumption;

Minimizing travel costs;

Minimizing training costs;

Minimizing energy costs;

Reducing telecommunications costs;

Adjusting employee benefits to market;

Opportunities to reduce costs through outsourcing;

Optimizing technology investments; and Other issues identified by members.

Aside from providing organizations with information on the reality of cost cutting, the following shall be similarly discussed.

The advantages and disadvantages of cost cutting

When, where, and how, cost cutting is effective/ineffective

The effects of cost cutting

Research Design and Methodology

The research design and methodology of the paper will be a qualitative style of research. The author will use four methods of research, observations, interviews, survey forms and focus groups. The hope is to combine these methods and research findings to demonstrate the thesis of the paper and create innovative new ways to approach future research.

The author will first conduct an interview to employees of five companies belonging to different industries. These companies are currently in the verge of financial problems and are currently implementing cost cutting as among the strategies to save their companies and to enable them return to the game of competition with other businesses in the same industry. In addition, these companies used in this research belong to medium-scale enterprises, in that they employ about 1000 employees.

The author will use 5 methodologies in this qualitative research on cost cutting. These 5 methodologies are as follows.

Interviews

Surveys

Focus groups

Internal data

Observation

The interview and survey methodologies will be merged by the author into one process through the use of questionnaires. To do this, the author will conduct the process to 30 employees in each of the companies. Questionnaires containing evaluative questions on the current cost cutting strategy being experienced by the employees will be distributed for the employees to answer. After which, another set of evaluative questionnaires containing the same questions but rephrased and asked in different format will be distributed to the same employees. The goal of the second set of questionnaire is to verify the authenticity of the participants' perception regarding the current cost cutting in their companies.

The focus group methodology will come in place within the merged interview and survey process. The author found that some of the 5 companies implement cost cutting only within particular departments/divisions in their organization structure. On the other hand, it was found that the rest of the companies are currently following cost cutting policies within the entire organization. In view of this, the 30 participants in the questionnaire process will belong to 5 different departments which will be considered as the grouping in this research and study. That is, the author will select 6 employees from every department to answer the questionnaires. From this grouping, it is hoped that the author can determine at which point is cost cutting effective and ineffective. For instance, if IT staffs in the department of information technology are reduced and the employees experienced project delays after the employee-reduction, it can be deducted that employee-reduction makes cost cutting ineffective. Of course, further validation to such inference will be required before concluding that employee-reduction really makes cost cutting ineffective.

For the internal data methodology, the author will conduct interviews to the companies' managing department particularly the companies' executive management. It is hoped that from them, the author can acquire information regarding the outcome/results of cost cutting within their companies. That is, whether cost cutting helped in saving their companies from financial crisis. Additionally, information on the rate of earnings of the company can help the author determine whether cost cutting has implications to the companies' clients and customers.

Internal data will be gathered from the human resource department of each company. It is hoped that the human resource can provide information on the overall impact of cost cutting to the employees. This includes information such as the rate of employee turnover after cost cutting has been implemented or the satisfaction rating of employees for their companies during the cost cutting period.

Finally, the author will also conduct observation of employee behavior during cost cutting period. It is hoped that through the employee behavior, while cost cutting is continuously implemented, the author can determine whether there is a change in the employees' motivation to work for their company.

Literature Review

Whenever businesses experience financial downturns, one of the immediate solutions being thought of is cost cutting. Several questions related to cost cutting usually comes to mind of a company's management department. According to Christine Pardinas, in her article Cost Reduction in Small-Scale Operations, the following are the initial gut reaction of most businessmen.

To lay off workers to decrease labor cost?

To compromise on quality of raw materials?

To skip an "non-essential" production step, like double finishing or inspection?

To skip promotion and other marketing activities?

These reactions often mislead businesses to more problems. To businessmen, the response to the idea of cost cutting is "why not?" This may be an ideal solution because of the perception that cost cutting will simply reduce cost. After all, a business is all about cost (Pardinas, 2005). However, before taking cost cutting as a financial crisis solution, there are important things that must considered. Pardinas (2005) further indicates the following.

A before you start laying off people or buying cheap materials - think again. Do you think doing so would guarantee an effective cost reduction program? Those would save you a fast buck, no doubt. But what about the long-run viability of your business? What happens to your commitment to product quality? Your orientation to customer service?"

Paul Ter Weeme (2003) reveals that cost-cutting provides significant advantages to some companies. Although there are other strategies found in improving the financial performance of companies, cost-cutting was proven effective by chief officers of Fortune 500 companies. Ter Weene (2003) reveals that,

While the obvious answer to improving overall financial performance can be found in attracting new customers, reducing the cost of goods, and cutting operational costs, many executives might be surprised to learn that analyzing and controlling the cost of indirect goods and services can provide significant savings opportunities.

Most companies are adept at managing their direct spending, but when it comes to the indirect procurement process, there's a lot of inefficiency. Indirect spending represents between 20% and 30% of a manufacturing company's expenditures and 40% and 50% of those of a service company.

By applying principles used when managing direct spending, even the best-run Fortune 500 companies can cut indirect spending by 10% to 30%."

Another industry that proves the benefits of cost cutting is the airline industry. These days, it has been quite popular to airline passengers to patronize budget airlines that offer cheap travel services. In the UK and Southeast Asia, there are budget airlines that offer airfares at almost less than half of other carriers' price. How do such airlines do it? The answer is cost-cutting. Biz-Ed Online lists the following cost-cutting strategies of budget airlines.

Flying to and from airports that offer cheaper take-off and landing fees

Flying more often than other carriers

Using online and telephone booking systems to eliminate travel agent commissions

Using a ticketless booking system

Ending free meals and drinks during flights

Not allocating specific seats to passengers

Accepting less central check-in desks

The effects of these cost cutting solutions were found beneficial because of the effective cost cutting strategies implemented by these businesses. However, to other businesses, particularly those that failed in their cost cutting strategies, the reason found for the failure is the ineffective implementation by the management.

Despite the proven success of cost cutting to the businesses mentioned previously, there are also risks and disadvantages that may end their success. For instance, companies in the airline industry that implement cost cutting receive negative comments and feedbacks from flyers concerning their quality of service. According to Claes Fornell (2005), in a Q1 2005 customer satisfaction survey, there is a plunge in airlines' customer satisfaction due to cost cutting. Fornell indicates that,

Although such cost cutting may help short-term finances, the effect on service and passenger satisfaction is often negative. For example, U.S. Airways is not doing well with respect to on-time performance and passenger complaints. Frequency of mishandled baggage is growing as well."

In another study conducted by Timothy Sturgeon and Frank Levy (2005), on the impact of outsourcing as a means of cost cutting, negative effects and risks were revealed. Sturgeon and Levy (2005) explains that,

In the 1960s and 1970s American companies began to move labor-intensive processes to offshore locations to reduce the costs of goods and services intended for the United States market. The negative impacts of these "cost cutting" investments were more obvious. Jobs, and later entire industries service the American market were seen as being "exported" to places with low wages and poor standards of living."

Whenever there is a plan for cost cutting, organizations and firms usually announce this to the public. The announcement usually presents to the public that the cost cutting plans are meant for optimization or restructuring of an organization. However, because cost cutting plans are usually announced, business analysts find risks to this particularly concerning the perceptions brought to clients and customers.

Severin Borenstein and Joseph Farrell, in their study entitled Is Cost Cutting Evidence of X-Inefficiency? suggest the following.

Drawing inferences from cost cutting announcements faces another problem, because a price shock that (say) lowers the firm's overall profitability is likely also to lower its marginal profitability. Thus, the null hypothesis that firms simply are reoptimizing likely predicts that the firm will reduce output, and presumably also reduce at least some inputs;"

Based from the different researches, studies, and analysis conducted on the effects of cost cutting, varying results and conclusions were identified by the author. Hence, up to this point, the hypothesis that cost cutting is not a quick solution that guarantees reliable and effective financial crisis solution, and the hypothesis that it depends on the strategic implementation methods used, still stand.