During difficult times, CFO edicts such as “all cost centers must reduce cost by at least 10% in the next three months” are not unusual. This linear, across-the-company directive may seem like a politically palatable option, but in reality is one of five avoidable cost-cutting traps. Oftentimes these initiatives, which look like acceptable ideas, are generally bad business decisions.
“Pressure from an unstable and uncertain business and economic environment has led to embark, often blindly, on emergency cost-cutting programs,” “But the savings can be less than satisfying and the impacts on the business can be negative.”
Cost-cutting campaigns can be tempting to limit a more careful analysis and resort to traditional money-saving approaches. However, companies need to consider value and risk when making these decisions, and avoid the typical cost-cutting traps.
- Be Nice to Everybody
Make business-blind, “politically correct” directives across the board.
Is your first solution to issue a linear cost-cutting directive across the entire business? The problem with this approach is that what one business unit can bear without major issues, for example, a total ban on overtime, might hamper a high-volume sales campaign in another department. As value-add depends on a complex network of process steps; evaluate the entire value chain to understand how and where value is added and which parts can be reduced.
- People Are Expensive and Visible
Save on people (and eliminate skills and talent).
The more people laid off, the more money saved. The more people who are laid off, the more intense the negative effects on business initiatives, performance and outcomes. Plus, it will later cost more time and money to restore the workforce. Ensure you maintain the critical minimum mass for resources and the minimum team to keep the business running, and use process design methodologies to assess minimum requirements for each process.
- Focus on Urgent Problems and Forget the Rest
Sacrifice the future (nobody’s watching).
When it comes to saving money, it can be tempting to abandon long-term projects, processes or services in favor of more immediate, “plain vanilla” alternatives. However, it can be more challenging to derive business benefits from lower-cost replacements, and the company risks losing valuable business knowledge. Do not automatically sacrifice long-term initiatives. Assess the business value that will inevitably be lost.
- It’s Not My Problem
Put the monkey on your business partners’ shoulders (and compromise your business network).
When looking for ways to cut costs, switching business partners to a less-expensive alternative may seem like a good idea, particularly if the decrease in quality and efficiency has no immediate consequences. However, this type of switch will impact, on the other side, a partner who is also trying to cut corners, which will lead to problems down the road. There is no free lunch. Less-expensive partners; means inferior services, which likely means less business value. Assess internal business risks that could result from a switch, and don’t forget to factor in the cost of switching, such as penalties from the old contract.
- It’s “Every Man for Himself”
Cost-cutting campaigns often approach the situation by focusing on individual areas or individual business initiatives, instead of evaluating the business as a whole. But it’s important to assess the business value and the business risk as they affect the entire business, and allow leaders to focus on the potential negative effects of proposed cost optimization initiatives. Consider consequences such as damage to the brand, negative client perception, loss of critical resources or a sacrifice in terms of competitive positions. For each area or initiative, ask two questions: What business value is being delivered by this business activity and what business risks will ensure if cost optimization actions affect this activity.