In turnaround management, cost-cutting is the low-hanging fruit, easy to reach, quick to execute, and highly visible. It signals action, buys time, and soothes stakeholders.
However, like all quick fixes, it carries the risk of being taken too far. It becomes the very force that kills the business you’re trying to rehabilitate.
To understand this risk, we need to consider aspects such as the Laffer Curve. Although originally designed to explain tax risks, its shape speaks volumes about business turnarounds and cost-cutting.
At 0% tax, there’s no income for the government. At 100% tax, citizens are not incentivised to work, again resulting in no government income. Somewhere between those extremes lies the sweet spot, a point of equilibrium where contribution and reward are balanced. Apply that to cost-cutting, and the message is clear: cut too little and inefficiencies continue to drag you down, cut too much, and sever your income-generating muscle.
Profit doesn’t live in extremes. It lives in balance.
However, balance isn't easy to find when dealing with multiple stakeholders. Enter the Nash Equilibrium, an uncomfortable balance, not a perfect one. It is a point where all parties are aware of everyone else’s position and accept this least-bad outcome for all.
In turnaround management, the practitioner becomes the reluctant conductor of this flawed orchestra. Creditors want payment, staff want job security, and owners want control. Not only are all the affected persons playing different instruments, but they are playing different songs.
While equilibrium can be reached, it is more likely that a Nash Equilibrium will be adopted. This Nash Equilibrium is not where all parties are satisfied, but a point where no one can improve their position without making things worse for someone else.
Think of the practitioner reducing costs to appease creditors, only to face a shortage of resources, resulting in lower productivity and renewed pressure for more cuts.
So, what should a turnaround manager do?
Yes, cut costs — but not with a chainsaw. Use a scalpel.
Understand that success lies not in slicing away expenses but in breaking overspending loops, reshaping narratives, and finding that narrow space between panic and profit.