The first semester of 2020 has left organizations of all sizes in a very compromised position. Those that belong to the most-impacted industries (local commerce, hospitality, local services, tourism or supply chain providers of these industries) have either closed their doors or are in a pretty bad shape. Other industries have seen their sales reduced by at least 20-30%, if not more.
As government support dries up and companies realize that even with a vaccine on the way, the disruption is going to last several months, it is time to leave the “emergency thinking” state and move on to a more structural, forward-looking view of the business. I’ve written in the past about two items relevant to these times: sustainable savings and the “minimum viable business” model. I would like to refer to both concepts again, as we reflect on something everyone hates… cost cutting.
Everyone Hates Cost Cutting….
Cutting costs is unpopular. It creates issues in the organizational culture, it triggers internal political rivalries and it can even disrupt operations. However, it is without doubt something that you need to do well, by the book and according to best practices.
On top of the above difficulties, you may also alienate your customer base, strangle your value-producing activities and even trigger bankruptcy or closure. Performing cost cutting in an objective, responsible, people-sensitive and analytical way is perhaps one of the most difficult tasks a manager will face. It is also one of the most unappealing. Therefore, most of us tend to look the other way until it is inevitable. And that is part of the error – you end up doing it in a rush, unplanned or without any margin for flexibility.
But if you come to face this task, I would like to provide you with some guidance on the process. Let us begin by focusing on the key principles of any successful cost initiative:
Start With the Balance Sheet
Your main objective is to lower your cost footprint. Depending on the type of company you are, this could be a mix of sales-related costs (inventory, manufacturing, maquila services, etc.) or expenses-related with the daily ongoing costs not necessarily related directly to the sale itself (T&E, personnel from some areas, IT infrastructure, services, utilities, etc.)
In any case, the beginning of this process is the same. You need to understand your annual expenditure (to understand the items and cost triggers on a normal annual basis) and then understand where you stand at the moment, what expenses have been delayed and if there are expenses that were triggered earlier.
This mapping of costs helps provide you with an 80/20 outline of the run cost for your company. Make sure you understand the sourcing part of those expenses (expenditure categories, suppliers per category, annual contracts, blanket contracts, other non-contractual expenses, etc.)
Once you have that initial spend analysis, you may be ready for the next step…
The Minimum Viable Business Model
Focus on what is crucial to your value delivery for the client. As mentioned in a previous article, you have to set apart the “must haves” from the “nice to haves” or “important to haves.” Explore your current commercial environment. What pending opportunities require investment and the risk in your cashflow? Based on that, and in alignment with company strategy and risk appetite, decide where you will focus you cost reduction initiative.
- Focus initially on the “80” rather than the “20” of the 80/20. It might be better to reduce 5% from the “80” than from the “20.”
- Identify if there is any “low-hanging fruit” – things that could be easily to cut or reduced with minimal impact to the operation.
- Identify the processes you need to protect, the ones that are indispensable. Of course, everyone will tell you that their processes and area are indispensable. However, focus on your “minimum viable business” model and make cuts accordingly.
Center your efforts on your target opportunities: define where you are going to start for an initial analysis. Identify the strategic direction of the cost cutting process. It can be also useful to have market research opportunities that uncover unsatisfied needs or pain points that need to be addressed.
Once you have identified the target cost-reduction opportunities, assign a task force with specific reduction targets for each opportunity, so that they can focus on the “how-to.” These opportunities might look like “need to reduce communications spending by 10%, cost of sales by 5%, T&E expense by 30%, payroll by 5%, real estate by 8%,” etc. Please note that I am not saying Department X, Area Y. Neither am I saying “cut this percentage across the board.” That rarely works, although it may provide the illusion of a successful cost-reduction effort for a few months.
In this phase, working groups may look at technology, processes, re-structuring of the organization or parts of it, etc. The most important thing is to not only bring ideas, but to develop and place numbers on the expected costs to carry them out.
The whole process should not take more than six weeks to this point. Once there, share the possibilities with the management team and the expected results and resulting profit and loss (P&L) if everything goes well. This is the point of no return, where you need to decide what you will focus on and what you will leave for later.
Several strategies are important for implementation, while minimizing negative impacts:
Treat this as any other crucial, strategic project. Do not skip on communications with the stakeholders and the whole company:
- Provide context and a compelling reason for why you need to do this. This needs to be easy to understand, straightforward and logical to anyone. No one likes cost cutting, but people can understand the need for it.
- Try to avoid drip-feeding information on the measures. That creates a sense of uncertainty that adds to the effect of the news.
- Be transparent, honest and respectful. Explain how painful this is for the company and your commitment to making the landing as soft as possible.
- You don’t have to provide all the details, but let people know that there is a plan and that it will tackle the main sources of cost.
- Set a pace for communications, either with news or with “no news”. Try to be reliable and regular in your communications.
Once the plan is communicated to the management team, make sure Human Resources are onboard with the plan and are working to devise ways to minimize the impact to staff and stakeholders. When reduction of personnel is necessary, look for upskilling and recycling of good employees into other roles. Finally, support the impacted personnel with re-training, marketing of positions to other companies that might need those profiles, etc. It is important that your remaining staff see the company takes care of those that are leaving.
Austerity Key Performance Indicators
Once the plan is deployed, there must be managers responsible for each stage of the plan. They also need to be responsible for the reduction goals themselves. These goals are not theoretical (“this process now cost less”), they need to show up in the P&L. Your decision makers need to be bound to the cost reduction process.
Demonstrate consistency between what you do and what you preach. If the company is in “austerity mode,” all actions from the company and its leaders need to be consistent with this line of thought.
There are a number of techniques and methodologies for sustainable cost reduction that we use in our practice, at exyge.com. There are also some interesting books like “Costovation” by Stephen Wunker or AT Kearney’s “Procurement Chessboard” about seizing the opportunity of cost reduction to buy better. But the most important attribute of your cost reduction initiative is thoughtful planning. Your opportunities might bring automation, virtualization, lean principles or other improvement initiatives, but they don’t exist by themselves, in a vacuum.
You don’t have to like cutting costs. Probably no one likes it. However, it is your responsibility to your company and your people to do it correctly. Maximize the value your company obtains from a well-managed cost reduction program.