I find it surprising when investors, particularly Wall Street, cheer a company for reducing head count because it is usually not a good business decision. I am not making a moral statement; it is about the underlying business reasons. While reducing head count does immediately reduce the cost side of your business (outside of redundancy expenses), it usually has a greater impact over time on revenue.
People create revenue
Your team is how your company creates revenue. They build the products customers pay money to purchase. They provide support so customers return and continue spending with your company. They market the product so people learn about the product and buy it. At the root of business, companies employ people because they make money for the company. The logical extension of this argument is that if you reduce the number of people, you will have less people generating revenue.
Julian Simon trumps Malthus
Malthus and Julian Simon were two economists of different eras but more importantly different philosophies, and history has proven Simon correct. Malthus lived in a time when people had a short life span and had to spend most of their time on difficult work. He theorized that as the population grew, the situation would get worse as there would be less food, more disease and overall fewer resources to go around.
Julian Simon, conversely, argued that people were incredibly resourceful and always came up with more efficient ways to use resources. Thus, as the population grows, there would actually be more to go around and people would live better. When people argued that oil would run out or we would not have enough food to feed ourselves, he argued that these would not be problem’s due to human intellect.
Simon famously bet Robert Ehrlich, a Malthusian economist, to pick any five metals and Simon argued the price would decrease over time. Simon won the bet. Continue reading “Why reducing headcount hurts profits”
