The 5% Decision: Turn cost reductions into a strategic advantage

By Rusty Holman, M.D. and Helen Lane

Financial pressures and uncertainty are endemic in the healthcare industry, especially for provider  organizations. Cost-reduction efforts are an expected, normal consequence of operating a business under such conditions. Naturally, labor costs become a focal point for managing expenses and this typically means layoffs, hiring freezes and/or salary reductions (often communicated as restructuring, consolidating positions, delayering, or right-sizing). To preserve patient care and service, eliminating administrative, managerial and non-patient facing roles are prime targets, leaving the remaining managers with new expectations and expanded responsibilities.

During staff reductions, an organization is extremely vulnerable. Decreased morale and engagement, fear, eroding trust, productivity drops, unwanted attrition, reputational risks and potential lapses in care and service are unintended consequences of cost-cutting. The good news? Just one decision has the power to mitigate and even reverse these risks.

Here it is: instead of booking 100% of the layoff savings, go ahead and book 95%. Then make a 5% investment in your remaining managers with leadership development to help them positively reshape the new organization. That is the strategic difference between cutting and shaping.
We will call this the “5% Decision.”

Let’s look at the return on investment of a 5% Decision:

• Forge organizational trust. Cost-cutting initiatives risk injuring the trust employees have in the organization. The 5% Decision is a concrete way of showing the organization is self-aware and realistic that cost reductions are tough, unpopular choices. Executives can demonstrate alignment between mission and core values by supporting its people in times of disruption. Open communication and transparency of decision-making go a long way to establishing credibility. The process of having to make cuts will come across as fairer and more credible if concrete investments in people are made, demonstrating a genuine concern for employee well-being and success.
• Build strategic trust. Strategic trust refers to a belief among employees that the announced strategy is the best bet, and that the organization can execute that strategy. If executives announce layoffs, restructuring, expanding scopes of responsibility and consolidating leadership positions for the sake of becoming more efficient and streamlining decision-making, then a 5% Decision makes achieving those goals far more attainable.
• Mitigate unwanted attrition. Healthcare already faces severe workforce shortages. Layoffs signal instability and uncertainty, making it even harder to keep skilled professionals who may leave for more stable environments. The 5% Decision supports leader’s effectiveness in creating resilient teams, managing uncertainty, and building better work environments to minimize good people from voluntarily leaving.
• Stabilize productivity. Cost reductions and restructuring are another form of disruption, transition, and change. These are stressful events that evoke anxiety, distraction, and disengagement, thereby putting productivity at risk. A commitment to invest in leadership acumen equips managers with greater skills to empathize with their teams, prioritize work, and invite new ideas for efficiency and better workflow.
• Make better decisions. Leaders working through transitions, new responsibilities and a leaner organization must be trained in decision rights, decision-making strategies, how to make high quality decisions, and how to understand the impact their decisions have on the rest of the organization. For example, a substantial body of research indicates that people will generally support an unpopular decision if they perceive the decision-making process is fair. The 5% Decision can ensure all of your managers are proficient in fair decision-making processes.
• Establish mutual respect. Respect in the workplace is rated the number one factor for engineering a healthy culture, by a massive margin. It is twice as powerful as the next most important attribute (“having supportive leaders”) and nearly 18 times more important than the average characteristic noted in a 2021 study by MIT Sloan Management Review. Training leaders in proven methods to build a respectful environment pays massive dividends in employee satisfaction, sustainability and staving off a toxic organizational culture.
• Improve engagement. Numerous studies have validated the impact of disengagement on quality, customer interactions, absenteeism, lack of initiative, turnover, missed deadlines, errors, morale, culture, and productivity. Making a 5% Decision to equip your team leaders with compelling engagement practices is essential to your strategic risk-mitigation plan.

Shaping your organization with a 5% Decision is a precise, strategic method of cost reduction that simultaneously eliminates waste and expenses while creating far more elegant designs by reinvesting in the organization’s future. A shaping philosophy acknowledges that when staff is reduced and big changes are made, the remaining employees need additional support. The 5% Decision ensures managers are prepared for their expanded responsibilities and more capable of translating turmoil into
victories.

Protect the long-term health of an organization and mitigate immediate risks. Investing in leadership development and coaching is a competitive advantage in today’s healthcare environment. Organizations that shape rather than cut will be stronger, more resilient, and better positioned for
success.

If your organization is facing tough financial decisions, there is a better way to move forward. Let’s talk about how the 5% Decision can dramatically stack the deck in your favor of a successful outcome.