Tue, Nov

Slash and burn

Slash and burn

Cost cutting is still high on most company agendas, but it's all too easy to do long term damage for short term gain. Follow these pointers for a more sustainable process. 

The pressure's on,the chips are down, the clich?s are coming in thick and fast. Now, with credit tight and sales fragile, is the time when every managing director gets to prove whether they are really worth the money. And one crucial test of a boss's success is whether they can lead their company to make sustainable reductions in costs. Cuts always look good on paper. But the best managers can look at the figures and visualise how they will affect their business. One routine mistake companies make is to consider cost cuts in isolation, ignoring the possibility that these reductions may affect sales.
Today's savings may be tomorrow's burden if they actually lead to lower sales volumes. But it's important that you are bold in your discussions. Sometimes the best way to cut costs over the long term is to stand back, figure out where the business needs to be and work backwards from there. In India, this process is called "frugal engineering". It may be that the business model which has served you well so far needs to be discarded or redesigned.

1.Don't expect too much if you apply the same cut across the board
It sounds easy. The financial director announces that in the current climate, every department will have to be cut costs by 10%. The figure is simple, memorable and probably achievable. And it focuses everyone's mind on costs. Why then do so many experts caution against this technique? For a start, you don't know whether you're cutting the right 10%. In some departments, a 10% cut may be too little. They could save more without damaging the business. In others, a 10% cut may leave you dangerously exposed. And once you've cut 10% across the board, it is harder to go back if more cuts are necessary. The alternative - to actually look at your business model and methodically explore potential savings in each department of the business - may take longer. But it is a far more sustainable approach to cost cutting. In boom time, companies grow by stealth, acquiring new costs without management really noticing and accepting imperfect working practices and processes because the order book is so full. Tougher times give management a chance to rethink the business to ask the big question: if we were starting from scratch, would be set up the way we are today? And recessions also give management the rationale to act, to make changes that may be painful, but may save the business. A 10% cut in costs is only a one off. If you ask the big questions, you may adapt your business model in such a way that, as you become more efficient, it yields cost savings year after year.

2.Don't just defer costs
Once again, it sounds easy. Let's not invest in that kit or that brand new website. We can do that next year. Some companies will have to make this kind of decision even if it is just to buy some breathing space. But you have to ask yourself: has the rationale behind that investment really changed? Will postponing it damage your business? And remember - next year, the costs will still be there. You're not really transforming your cost base, just massaging the figures.

3.Understand what effect the cuts will have
The simplest way is to draw up a list of cuts and then rank them according to the damage they will do to your business - and especially to sales and cashflow. Start cutting the ones that have no discernible impact and take it from there. If things get really tough, you may face a choice between the unpalatable and the disastrous. The advice here would be: Do what you have to do to stay in business. Just try not to make the damaging cuts first.

4.Talk to the staff
Don't just admonish them that we have to do everything cheaper. Invite them into the process. Some management consultants have suggested that a careful, systematic attempt to eliminate such buffers as "I always order ten days before just to be on the safe side" can reduce inventory by 20% without jeopardising the company. And if you want to restructure a department, ask the staff what they think the most efficient way to do that might be. You might be pleasantly surprised.

5.Think big and small
Sometimes you have to ask the big questions - Can I outsource this function? Should I sell that unit off? Would it be best to withdraw from that market? - to make the big savings that will transform your business. But equally, sweating the details can pay off. IT giant Cisco's fortunes began to improve when a new CFO, amazed by the size and complexity of the monthly profit statements, ordered them to be reduced to a single A4 sheet. It saved paper and time but also sent out a powerful symbolic message that the company was rethinking its financial processes.

6.The finance director is not the pope and should not be regarded as infallible
In recessions, everyone focuses on costs and internal squabbles over allocation intensify. In these disputes, the finance department is not invariably right. The way invoices and costs are assigned should be transparent and accurate. If it isn't, you won't have a true picture of your business performance and staff who are being asked to cut costs will quickly get demotivated.

7.Crunch the numbers

Use your management information system to make sure your impression of the business is as accurate as possible. And, while doing your best to avoid 'analysis paralysis' use the technology to look at your company in different ways. Maybe that big new account isn't delivering as much 'added value' as the headline figures suggest.

8.But don't put all your faith in technology
In technically driven companies, it is often tempting to believe technology will solve your problems. But when one chemical company ran a pilot project to improve efficiency, 60% of the savings came from new work processes.

9.Track the savings
Even cuts that sound simple - let's take 10% off across the board - can be complex to implement. Departments may claim they have made the savings but it may be hard to identify, overall, whether the programme is on track. And when processes are changed, it is vital that you make sure the expected savings are accrued.

10.Consider how you cut the head count
Shedding staff is a quick win and the savings are easy to predict. But you don't want to cut the wrong people. Ideally, the decisions should be made on a meritocratic analysis of talent and performance, not driven by a manager's insistence that employee X, a fully paid up member of the awkward squad, has it coming. And trying to be fair - cutting 10% across the board - may actually be unfair because staff who are performing well may be cut along with those that aren't. And you might want to consider whether you might save more by redefining roles and breaking down the silos in your organisation.

11.Lean is a state of mind

As the economy begins a recovery of indeterminate speed and strength, keep your business on a cost base that makes it viable even in recession.

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