States, like most economic entities, will struggle with a classic management dilemma when their expenses exceed revenues.
When this happens, they’ll oftentimes focus almost entirely on cutting costs.
However, turnaround managers learn that it’s tough, if not impossible, to save yourself into a sustainable profit. This is because when revenue flatlines or declines, the inexorable growth in expenses quickly become overwhelming.
If the focus is on costs, the situation will continue to deteriorate and recovery will become increasingly difficult. The belief sets in that survival is only possible if dramatic action is taken — divisions shutdown, sizable layoffs and so on.
The reality is that cutting costs is an important step in the turnaround process, but it isn’t a path to recovery. Only an increase in economic activity is an indication of recovery, and only increasing revenue can put an organization on a sustainable growth path.
Sustained increases in revenue allow for investment in the future instead of just keeping up with increases in operating costs.
As a practical matter, governmental organizations are labor-intensive and the majority of the budget goes to wages and benefits, leaving few options when it comes to reducing costs. There’s waste and inefficiency like you’d find in any large organization, but even if all of it could be eliminated, the savings wouldn’t do more than temporarily improve the state’s budget outlook.
I should point out that I’m referring to typical general and administrative operating expenses. I’ll leave the growth in pension fund obligations to another column.
Don’t get me wrong, every organization should constantly be looking for ways to reduce operating costs, improve productivity and increase efficiency.
The point is that the best path to improving Connecticut’s economy is one that is more focused on growth and less focused on trying to “save ourselves into a profit.” We’d be in better shape already if more of the past few years’ talk about cost-cutting had instead been about what we can do to create the conditions that will attract increased investment.
Here’s the thing: We can change this narrative. To the degree that we’ve been talking about growth in more than platitudes, that narrative has largely been in the hands of one governmental entity or another. Left in the hands of these well-intentioned folks, the tendency is to create some kind of advertising program, give it a catchy name and market it as a big thing that’s going to somehow change the view of Connecticut held by those who are looking to place investment capital. One of the advertising principles I’ve learned is that advertising can’t turn a bad product into a good one. We have to give people a product they want to buy or, in this case, one in which they want to invest.
We have a lot of terrific people in economic development in our state. The problem is that we need to hear more from people who have direct experience running businesses and investing capital. The people we need to hear from are those who are dealing directly with state regulations and meeting payroll every week. The input of CEOs is great, but we need their operating folks at the table, too.
Connecticut is blessed with many talented and experienced people working in high-value industries, including financial services, insurance, aerospace, shipbuilding, high-tech and clean manufacturing, bioscience and health care. These industries are also represented by industry associations, which are led by some of the best executives in their respective industries. We need to get these people engaged in this discussion, too.
R. Michael Goman is a principal of Goman + York Property Advisors LLC, an East Hartford-based real estate advisor.
*Article as seen in the Hartford Business Journal