Organisations usually adopt cost reduction only as a short-term solution to an immediate crisis, then fall back into their old spending patterns as soon as the crisis passes. While they may be effective in the short term, such cost reduction techniques, executed in a rush and without a long-term vision, can prove counterproductive and make a company less competitive.
Effective cost reduction requires careful research and planning and must take the organisation’s overall strategy into account.
Here are a few tips to bear in mind to help you cut costs in a smart way that results in sustainable efficiencies:
- Define ‘how much’ before ‘how’
Before defining how to reduce costs, you need to determine by how much cost needs to be reduced. For example do you want to decrease costs in a certain area of your business by 20% by the end of the year? Or to achieve an overall cost reduction of 10% over the next two quarters?
This process of planning and setting clearly defined targets will prevent you from implementing a cost-reduction drive that’s either overzealous or excessively prudent. The goal should be to increase cost efficiency while maintaining profitability.
- Don’t impose a single cost-cutting target across all departments
It’s not unheard of for organisations to announce a flat and a linear cost reduction across all parts of the company.
Setting a 10% cost-cutting target for all functions might sound simple and fair. However to achieve sustainable efficiencies, you should weigh up where cuts are truly feasible without major negative impact and where they would be counterproductive.
- Be strategic about reducing costs
While working to cut costs, you should look for opportunities to refocus resources to stimulate growth and differentiation. It might be that you can achieve both goals simultaneously. For example going through a digital transformation process could enable you to deliver more tailored and targeted client solutions at a reduced cost.
Think about reallocating resources from potentially wasteful expenditure towards higher value and higher return opportunities. If those areas help to differentiate your business and enable it to develop new value propositions, even better.
- Be ahead of time
Constructive cost reduction methods take time to identify, plan and implement. Be proactive in adopting cost reduction initiatives and aim to beat industry cost curves to generate higher revenue.
Developing a culture of continuously scouting for constructive cost reduction opportunities, rather than waiting for a crisis to trigger cost cuts, will help you improve your bottom line and build a competitive advantage.
- Consider the potential impact of any changes
Cutting costs to achieve quick wins, without taking the time to carry out detailed analysis and risk assessment first, can be more damaging than fruitful. Ideally, any cost reduction measures you implement should drastically improve both the efficiency and effectiveness of the relevant business area and not result in an increase in costs or drop in efficiency for another area.
You need to weigh up whether any measure you are considering will be worthwhile. For instance, it probably makes good business sense to cut a costly training programme that doesn’t yield the intended benefits. However, a pay freeze in an area of the business where staff are paid more than their colleagues in other functions might sound like a no-brainer. However, it could turn out to be a costly mistake when valued high performers start leaving to work for competitors!
In our experience, if done right, cost reduction doesn’t have to bring with it a sense of doom and gloom.
Taking a holistic approach – looking at expenditure across the entire business and from multiple angles – will help you achieve cost reductions that are sustainable and won’t result in unintended negative consequences. This should help to make your business both leaner and more efficient.
If you need help identifying and implementing effective cost reduction initiatives to achieve lasting gains, speak to us.