Frugal Photo Credit: investmentzen via Compfight

I was sitting in a board meeting recently and heard a phrase that always makes my skin crawl: Someone said they had instituted a “hiring freeze” in their area of the business. This is a common tactic to get a handle on costs. After all, in many businesses personnel costs represent two-thirds or more of the operating expenses. If you want to control costs, you obviously have to monitor hiring.

The problem is this strikes me as the easy way out. This particular executive manages a services business, where people are the product. You would never hear a product executive say, “Don’t bring any great new products to sell, we already have enough.” But that is effectively what this executive is doing.

The issue is that great people are hard to find, and you must run a continuous process to find them. When you find great people, you need to be able to hire them. You can’t stop and start hiring, and then hope that stars are available on your timeframe.

The executive works for a large organization that turns over hundreds of people every year. Now I am not saying they should just keep adding people regardless of the financial impact. Instead, they need to take a proactive approach to managing the workforce. This starts by rating the performance of every employee each quarter, so you understand who is providing the most and least value.

As business conditions change, you must actively manage the cost of the workforce to ensure maximum value. Sometimes that will mean bringing in potential stars because they are available, while letting go of the bottom performers. Top performers by definition will provide far more value than they cost. As a result, this activity will allow the organization to grow and employ more people than the organization could otherwise support.

As I was thinking about how to explain this, I realized how easy it is to be cheap. Being cheap just means not spending money. While this can have short-term positive effects on the bottom line, it is not a formula for success.

What you want is for people in your business to be frugal. The goal is to spend money wisely, in support of what the organization is trying to achieve. This requires much more training and thought but will lead to greater long-term success.

As CEO you will have to coach people to be frugal, because the easy thing is for them to be cheap. Don’t let it happen.