When crisis hits, most companies consider cutting costs to give them a better chance of weathering the crisis. Cutting costs equally across the board may seem fair but makes little sense. You want to cut costs but NOT reduce your capacity to attract and deliver for customers.
According to a McKinsey’s survey, 79% of all companies have cut costs in response to global economic changes but only 53% of executive think that doing so has helped their companies weather it.
Cost cutting often goes wrong because the problem is not tackled in a considered way at a company level. Rather each department is told a percentage to reduce costs by and expected to meet it.
Here’s an example – a manufacturing business targeted a cost reduction of 15% of staff and overheads. This was applied to each department regardless if the costs were well managed or not. In the best performing departments, the cost reductions cut capacity and the ability to deliver. In the poorer performing departments, the cost cutting removed the “fat”. Therefore, the cost cutting also cut into sales, which resulted in an increased profit of 5.5% not 15%. If the company had been more targeted, heavier cost cuts would have fallen on the poor performing departments and costs that could be saved between departments while reducing or removing the impact on sales.
“Most departments can cut up to 10% of costs without changing their interactions with the rest of the organization” (Havard Business Review).
Find many areas to cut a little, rather than hope to find one area to cut a lot
Most businesses keep costs in focus and under control. Finding areas to cut further and maintain service can be hard. If they were easy, chances are you would have done them already.
If you can find one area to cut a lot without damaging the business – great. It is safer and easier to target many areas to cut a little, and combined, these cuts add up to a significant amount. This approach is usually easier to implement and maintain.
Here are some ideas:
Deal with the underperformers
Every business has a few people whose performance is below what is required. Because they are nice, popular with the team or because their manager struggles with the idea of taking action, they remain in their roles.
Removing underperformers reduces costs without impacting your ability as much as removing staff that are performing. Secondly, it has an uplifting impact on those performing staff that remain. Their performance has been recognised.
Reduce lower value tasks
Everyone has tasks that are pleasant to do but not that valuable and tasks that are valuable but not that pleasant to do e.g. sales prospecting. Create a focus on value and reduce the amount of time spend on the less valuable tasks whether pleasant or not.
Reduce the total cost of pay rises
Many companies add x% onto everyone’s pay each year. You could reduce the x% so that it is smaller. Better would be reward your top performers with a higher pay rise and your lower performance with a lower one.
Another approach is to look at the market rates for each role or group of roles and only increase pay if the pay is below market rates. Or a combination of the market rates and performance criteria. Both approaches take more preparation, but the benefits in retaining the right staff far outweigh the effort put in.
Combine similar activities across departments
What similar activities are undertaken separately in each department which could be successfully combined to save costs. Examples might be celebrations or internal events or meetings, general skills training (e.g. presentation skills, recruitment).
For greater depth of cost cutting consider:
Remove layers of management
Reduce the number of management layers or the number of managers in each layer or both.
For example, if you have supervisors, junior mangers, middle managers and senior managers, you could remove 10% of managers in the top two layers, and merge the supervisor and junior manager layers, reducing this group by 20%. Each manager would have additional direct reports. By extending the remit of each manager, the business could still organise work and activities while saving costs.
Consolidating the management of two or more departments can also achieve significant cost savings without large impacts on output.
Reconsider the role of head office
How does the head office support the business? Would moving more of the decision making from the head office team down into the operating divisions reduce the size of head office and speed up decision making within the organisation? With the right frameworks and co-ordination processes, the control of the business does not have to reduce.
Remove weaker, or low value creation divisions
Look at the market trends and divisional performance. Removing loss making, low value creation or division heading into decline, can reduce cost burdens on a business and free up cash to invest in high performing areas.
Reduce innovation or strengthen the rigour in bring new products to market
Investment in innovation can be significant, particularly if many products created are not successful. Innovation is usually very important for future sales. Increasing the rigour in the innovation process can result in more focus on fewer products, giving each a better change of success while also reducing costs.
For example, undertake commercial reviews and size of market opportunity analysis early in the new produce development (NPD) process. Remove products that don’t meet pre-set criteria. This pushes up the commercial success of NPD and usually creates more focus on fewer products.
Reduce the number of products you have live within the business to reduce costs. This is particularly good for businesses that innovate a lot, forcing focus on the better performing products.
For example, a company reduced its product range from 560 down to under 200 and sales increased from the increased focus. Complexity was reduced within the company at all levels, saving significant costs in the process.
Every business has opportunities to cut costs without damaging your capability, capacity and ability to deliver to customers. It is important to always look at the value created by the spend in question. Departments can usually achieve 10%+ in cost savings without significantly curtailing activity.
To gain more, one should look on a business wide basis and consolidate activities or spend across departments, look at layers of management and how the business operates.
Each business is unique and therefore any cost cutting programme should be tailored to the needs and opportunities of that business. Effective cost cutting approaches do have many similarities, both in how to achieve and what to look at.
Emerson Nash are hands-on consultants specialising in business performance management. Our case studies take you through how we have made a difference delivering value of £100k to £24m to a variety of clients.