Partner: GCS
Cost-cutting is something that all companies strive to do effectively. However, if they are not careful, they may damage their company to the extent that they can possibly face financial distress. The proverb: cutting your nose to spite your face is very applicable in the business world.
The good news is that there is a way to do this effectively. I recently read an article on the Harvard Business Review (HBR) website which discusses this in more detail.
Starting the journey
The HBR article points out that, first, forget about finding a single idea that would radically change the cost structure of your organization or department, thereby solving your problem in one go. (If such an idea existed, it would most likely entail so much risk that the organization would never be willing to implement it.) Instead, you should plan to reach your goal with a combination of 10 or more actions.
Second, the degree of organizational disruption caused by your reductions will usually be proportional to the degree of cutting you do. Therefore, you should tailor the reductions you pursue to your savings goal. Incremental ideas with minimal impact on other departments can allow you to trim up to 10% of costs.
The HBR article points out that companies should redesigning or reorganizing ideas often eliminate the lowest-value activities, with moderate impact on other departments, and can help cut expenses by up to 20%. Cross-department and program-elimination ideas are usually necessary when you’re aiming for 30% or more, but they have the greatest potential to be organizationally disruptive.
Getting to 10%: Incremental Ideas
The HBR article adds that most departments can cut up to 10% of costs without changing their interactions with the rest of the organization.
Consolidate incidentals is a good place to start. Unless cost cutting is new to the company, you’ve already done away with most discretionary, comfort, and non-mission-critical perks and activities, such as holiday parties, event tickets, and tuition reimbursement. If that’s the case, don’t try to eliminate more—you probably can’t.
The HBR article adds that, instead, see if you can consolidate what’s left. Combine activities like training days and celebrations into single events. Combine events across multiple departments. Cross-schedule the use of outside resources, such as facilities or trainers. You’ll be surprised at the opportunities. For example, one university determined that Parents’ Weekend and Homecoming were both far too valuable to eliminate—but found that it could save close to 40% of the combined cost by holding the two events on the same weekend.
Image By: Alexander Stein via Pixabay
Getting to 20%: Redesign Ideas
It is rarely possible to achieve cost reductions of 20% unless you remove a significant portion of the work content from the department. It’s never a good idea to attempt to do the same work with 20% fewer people.
The HBR article points out that You should strive to eliminate any work for which the cost exceeds the value (keeping in mind that it surely has some value and that cutting it will cause a certain amount of discomfort). Start by identifying and aggregating all opportunities to reduce the department’s workload—even cuts that will save just one quarter of one full-time-equivalent (FTE) position—and then redistribute your department’s remaining activities among the smaller number of jobs. This will allow you to separate the decision to eliminate tasks from the identity of the individuals who conduct them. You can then determine which people are best suited for the new jobs.
An easy way to achieve this is to Reducing excessive service levels. Do you prepare long reports with comprehensive data when only exceptions matter or when the true consequences of variances are quite small? Do you prepare reports that cover short periods of time or are delivered in real time, when longer periods or slower reporting would meet the need just as well?
The HBR article adds that a company that it was doing research on was still employing several full-time clerks to sift through daily reports and manually highlight “important” variances long after a systems enhancement had changed the company’s understanding of which variances were large enough to matter—negating the need to examine 95% of them. What was worse, a senior executive’s assistant recognized that the reports were no longer useful, so she had stopped giving them to her boss. And since she had no knowledge of the effort required to create them, she had not notified the reports’ originators.
Getting to 30% or More: Cross-Department and Program-Elimination Ideas
The HBR article adds that you’re unlikely to find cost savings of 30% or more of your existing budget by looking solely within your department. However, you’ll be surprised at what you can accomplish by investigating how well the work of your department fits with that of the others. (An organization can be inefficient in total even if each group within it is efficient.) So if your goal is 30% or more, you must think more broadly.
Image By: Adabara Ibrahim from Pixabay
If you are hunting for savings of 30% or more, you may have to challenge even the most sacred of cows—and you may be pleasantly surprised at the outcome. One professional-services company that prided itself on hiring and developing the best talent was reluctant to change its approach to interviewing, selecting, and managing the performance of its personnel.
The HBR article added that the billable hours consumed by such activities were simply too numerous to ignore. An extensive review revealed that most of the related HR paperwork added to the time burden but did not improve results. Further, in the hiring process, three interviews by the best interviewers more accurately predicted a candidate’s eventual success with the firm than up to six interviews by less-skilled interviewers. The company restructured these activities in light of what it had learned, both decreasing the hours spent on them and increasing employee satisfaction and performance.
How do you approach cost cutting in your business? Alternatively, how do you discuss this issue with or with your clients?
Moses Singo is a Partner at Genesis Corporate solutions and is a Junior Business Rescue Practitioner
