“You Can’t Shrink Your Way Into Prosperity”

From a recent article in the Wall Street Journal:

[A]ccording to some analysts and students of corporate behavior, […] companies that take a limited and more-targeted approach to layoffs tend to do better in economic recoveries than those that slash employment sharply and across the board.

“You can’t shrink your way into prosperity,” says Wayne Mascio, a business professor at the University of Colorado, Denver.

Although the article focused on downsizing in private companies, I think that the conclusion applies nicely to the public sector, as well. This is particularly relevant to state agencies in Missouri as they cope with their budget problems. Instead of scaling back their operations proportionately, governmental agencies in Missouri should take a targeted approach, by identifying programs that are underperforming and subsequently eliminating or outsourcing them. This would increase the likelihood that the programs would recover and perform better in the future.

When determining which programs, or segments thereof, to cut, a firm or a government agency should also consider non-financial and indirect costs. This is because unintended negative consequences could adversely affect a firm or an agency’s bottom line, as well as its ability to perform core functions. In order to increase its overall growth and prosperity, a firm or agency should focus on the activities for which it has a comparative advantage, and then trade amicably with others that possess a comparative advantage in other activities.

The firm or government agency in question should also consider its opportunity cost for providing a program under review. Outsourcing non-core functions enables concentration on core functions, which can improve efficiency and quality. This way, firms and agencies alike could maximize their up-time and productivity.