Competitive Comparison of a Company's Cost Structure

Everyone has by now most likely heard that Bell Canada is removing 2,500 management positions. I think this is inevitable in the face of increasing competition in their core telecom business units. Arguably it should have been done well before now. Competition means that they must, as one of many necessary steps, reign in service prices to hold on to their market share. With revenue down it is a matter of simple arithmetic to see that costs must also come down, and people are a large component of those costs. Whether they are cutting the right positions and reorganize effectively remains to be seen.

I remember back over a decade ago when I was working for Nortel, we were speculating on the impact on the company as it increasingly found itself in competition with a new breed of company, those focused on IP products. At that time, direct competition with Cisco and others like it was still minimal; the products did not yet overlap very much, since VoIP growth was still a few years out and Nortel had not yet bought Bay Networks. Out of interest I did a rough estimate of the revenue per employee for Nortel, Lucent and Cisco. While I don't recall the exact numbers, the revenue per employee figures were something like this:

• Cisco: $300,000
• Nortel: $150,000
• Lucent: $100,000 (they had inherited a bloated organization from AT&T)

At the time I found this very striking. It was hard not to look around at all the thousands of people filling all those buildings and wonder who would have to go. They weren't hard to find, just as I am sure it is true today in Bell Canada; I would not be surprised to learn that a number of those redundant Bell Canada managers are people I know.

The back of the napkin calculation I did all those years ago was one factor among several that convinced me it was time to get out of Nortel. I'm glad I did. When the cuts really got going things got ugly, twice - once before the final run to the optical-driven market top in late 2000, and a second time afterward.

Since then I've been with several startups around Ottawa, and I have not forgotten the lesson of cost structure. In a startup every dollar, and employee, counts. In the early days of a startup you can't do the sort of calculation I did above since revenue is either not there or is small and lumpy, but you can project the cost structure in your business plan to match or exceed your competition so that when the revenue does come the company will be financially sustainable.

If you don't do this you'll have to make some hard, unpleasant decisions when revenue is delayed and salaries are burning the investors' cash. Your competition and your customers can help to keep your feet nailed firmly to the earth.