Article

Oper­a­tional Excellence

The Art and Sci­ence of Cost Cutting

December 27, 2019

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. Apply­ing both cre­ativ­i­ty and an ana­lyt­i­cal mind to the chal­lenge could turn a typ­i­cal­ly press­ing sit­u­a­tion into one that uplifts the organ­i­sa­tion in more ways than one.

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.

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