Often companies launch new products, expand businesses (globally), diversify their portfolio or start new businesses with the aim of enhancing growth and increasing profitability. But in industries which have low barriers to entry and exit, new players enter the market by replicating existing business models and offering similar products and services at lower cost, thereby making it difficult for the existing players to sustain their market share. As the revenue growth per player shrinks over the years, companies explore ways to maintain their profit margins, leading to a situation where cost becomes more important and price becomes one of the key differentiating factors in the market.
In such situations, senior management start hunting for measures to reduce their costs and expenses to improve profitability. Cost cutting (also known as cost reduction) is one of the steps initiated by the Business Managers to improve profitability. The Leaders make an effort to monitor, evaluate and trim their expenditures, and explore options to streamline processes, restructure their organization and cut down flawed expectations. Cost reduction can be a formal company-wide program or limited to a single department. It usually becomes a company-wide initiative during economic recession when their revenue growth struggles and profit margins shrink consistently for quarters.
In this article, I offer my views on few steps, strategies and precautions while taking up a critical project like cost-cutting and run you through some of my thoughts. I welcome your views and suggestions in the comments section below.
(1) First step in the entire process is to identify a target – how much to cut? This requires a lot of deep-dive, number crunching, hour long sessions with your Business Head(s) to determine how much would be an effective range. You might have to identify the broken strategies, half executed business plans or even stop promising opportunities. As we brainstorm the numbers, we need to look at them from the perspective of 5 year strategic plan.
(2) Understand the current cost structure and cost drivers.
- Identify costs and expenses that have returns and those that have little, minimal or no contribution to the revenue. This step shouldn’t be confused with businesses that are new. A new business might demand high investment initially, but may provide consistent acceptable returns over a period of time. As such, a thorough evaluation of the projects is a critical step. Net Present Value (NPV), Internal Rate of Return (IRR) and Payback Period are some of the handy tools for evaluation.
- Assess whether the non-value additional costs are a must. If not, can we do away with them?
- There may be costs that have to be incurred. Can they be reduced through automation, process improvement, low cost country sourcing/global sourcing, re-negotiation with partners, substitutes, etc.?
- Can costs and expenses be deferred? For example, large companies borrowing money through debts can have big recurring expense. Can the interest payment on such obligations be deferred through payment-in-kind?
(3) Explore options
- Recycle and explore concepts like “best out of waste”. Resources like water consumed is often a large part of the cost incurred in running large IT, manufacturing and automotive firms. Rainwater harvesting and recycling can save a lot. Also, constant training and education on controlling use of water helps. Another area that one might like to look at is cost of office supplies like paper. A lot of firms are now “going green” which helps not only in saving trees, but also in cutting down cost. Automated business processes that can accord digital approvals can go a far extent to achieve cost cutting target.
- Another large part of cost is electricity consumption. Usage of energy-efficient systems, solar powered equipments and natural air and light systems helps reduce significant costs. Renewal energy is the key!
- Transportation is another big area. Transporting thousands of employees daily to and from the office using own or leased facilities is very common. Many organizations now-a-days have implemented the concept of work-from-home to curb costs associated with transport. Channel sales operating strategy is another way to serve local customers cost efficiently. Many firms, now-a-days, partner with local players to service their customers on a profit sharing basis.
- Real estate: The cost of space is another big factor. Sprawling complexes with mighty towers equipped with all facilities and arrangements can punch a big hole in firm’s pocket. Again, work-from-home and consolidation can help reduce cost of operations significantly. Data center consolidation is one important factor worth considering, keeping in mind the huge cost incurred in license procurement, support, data security, high performance, high availability, manageability and meeting compliance standard and government mandates.
- Re-look at your resource utilization. Do you really need so many resources at this point? Is there any way by which I can utilize multi-skilled employees? Can we place a more experienced person here and move the aspiring, new yet enthusiastic talent where he belongs to through negotiations? Can we defer the promotions?
Precautions
(1) As you take up the cost cutting project, it’s worth mentioning that such a project is not worth pursuing if the CEO is not leading it. Most of CEOs just delegate this task to one of his directs, who in turn pushes it to their directs. The sad part is that most of these lower folks, who actually design the cost cutting strategy or perform the number crunching, do not have authority other than arranging meetings, generating reports and at the max, suggesting. While crafting the plan, everybody looks at easier numbers – the numbers that do not demand brainstorming.
(2) Another factor to keep in mind is that 10% cost cutting directive across the organization is not something I consider efficient. A 10% reduction in cost (assuming R&D, marketing, sales, operations and workforce) with the aim of restructuring a large business can have significant impact in the way it will operate compared to the impact it will have on a smaller business, which gets to keep 90% of the annual budget.
(3) Cost of people – the concept of “right sizing” – is another area. The big numbers easily catch our eyes and it’s very obvious to start the process here. I say this is how the disaster begins. Firing employees has a cost associated with it and at times, it can be huge. Severance pay, unemployment benefits, rehiring costs, workforce termination lawsuits, month long labor strike are few of them, besides low employee morale, cost of extended working shifts for the remaining employees, etc. Organizations lay off employees without contemplating much on their skills and attributes, thereby losing some of their best talents to their competitors. I know of companies which slashed their workforce with the objective of restructuring and realignment but slipped positions dramatically.
(4) It’s not uncommon for organizations to bring in consultants by paying a hefty, eye-popping fee. These consultants will no doubt offer insights that the Business Leaders may not even have thought of, but they stay with you for few months. Whether this investment will really reap benefits is something we can only imagine.
Also read my article on “Cost Cutting: A Case Study” here.
If you wish to gain any privilege to this blog, please write your message to me through the page “CONTACT ME” by filling in the required details in the form, OR by writing an e-mail to me at nitin@gargfinanceblog.com
Copyright Nitin Garg | All Rights Reserved
Gargfinanceblog 
I used to be recommended this website by my cousin. I’m no longer sure whether or
not this publish is written through him as no one else realize such certain about
my problem. You’re wonderful! Thanks!
I must thank you for the efforts you’ve put in penning this website.
I am hoping to see the same high-grade content from you in the future as
well. In truth, your creative writing abilities has inspired me to get my very own website now 😉
Great post. I will be dealing with a few of these issues
as well..
Gorgeous! That you don’t come by data similar to this simply
and that I am so pleased! Keep it-up folks!
Thankfulness to my father who shared with me on the topic of this
weblog, this web site is in fact amazing.
Hi there! Quick question that’s completely off
topic. Do you know how to make your site mobile friendly?
My website looks weird when browsing from my iphone 4.
I’m trying to find a template or plugin that might be able to
resolve this problem. If you have any suggestions, please share.
Appreciate it!
I have fun with, cause I discovered exactly what I was taking a look for.
You have ended my four day long hunt! God Bless you man. Have a
nice day. Bye
I do accept as true with all of the ideas you’ve offered to your
post. They’re really convincing and will definitely work.
Still, the posts are very quick for beginners. May just you please extend them
a bit from subsequent time? Thanks for the post.
Hi, i гeаd your blog occasionally and i own a similaг one and i was just wondering if you gеt a lot of spam comments?
If so how do you prevent it, any plugin or anything you ϲan suggest?
I get so much lately it’s driving me insane so any aѕsistancе is νery much appreciated.
I pay a visit each day some blogs and sites to read content, except this website gives quality based articles.
Magnificent goods from you, man. I have understand your stuff previous to and you are just extremely fantastic.
I really like what you have acquired here, certainly like what
you’re saying and the way in which you say it. You make
it enjoyable and you still take care of to keep
it wise. I can’t wait to read far more from you. This is actually a great web site.
I couldn’t resist commenting. Perfectly written!
I am truly delighted to read this webpage posts
which contains plenty of valuable information, thanks for providing
such statistics.
I am officially impressed with this particular website
and that I desired to take some time to thanks from
my heart’s base!
Hey, I think your site might be having browser compatibility issues.
When I look at your blog in Ie, it looks fine but when opening in Internet Explorer, it has some overlapping.
I just wanted to give you a quick heads up! Other then that,
fantastic blog!
Excellent post! We are linking to this particularly great post on our website.
Keep up the good writing.
Greetings I am so glad I found your blog, I really found you by error, while I was
searching on Yahoo for something else, Nonetheless
I am here now and would just like to say kudos for a remarkable post and a all round
interesting blog (I also love the theme/design), I don’t have time to browse it all at the minute but I have bookmarked it and also added your RSS feeds,
so when I have time I will be back to read a great deal more, Please do
keep up the awesome job.
Hi there, You’ve done a fantastic job. I’ll certainly digg it and personally recommend
to my friends. I am sure they will be benefited from this website.
Appreciate the recommendation. Let me try it out.
I know this if off topic but I’m looking into starting my
own weblog and was curious what all is required to get set up?
I’m assuming having a blog like yours would cost a pretty penny?
I’m not very web smart so I’m not 100% certain. Any tips or advice would
be greatly appreciated. Kudos
I go to see daily a few sites and websites to
read content, however this web site presents feature based writing.
Greetings! Very useful advice within this post! It’s the little changes that will make
the most important changes. Many thanks for sharing!
Terrific post however I was wanting to know if you could
write a litte more on this subject? I’d be very grateful if
you could elaborate a little bit further. Many thanks!
Howdy! This post could not be written any better!
Looking through this article reminds me of my previous roommate!
He continually kept preaching about this. I’ll send this post to him.
Pretty sure he’ll have a great read. Thanks for sharing!
Hello, everything is going perfectly here and ofcourse every
one is sharing data, that’s genuinely excellent, keep up
writing.
Hi! Would you mind if I share your blog with my zynga group?
There’s a lot of folks that I think would really appreciate your content.
Please let me know. Thanks
It’s really very complicated in this busy life to listen news on TV, thus I simply use internet for that purpose, and get
the latest information.
What’s up mates, fastidious post and pleasant arguments commented here, I am actually
enjoying by these.
You ought to be a part of a contest for one of the
highest quality blogs on the internet. I
will recommend this site!
I enjoy reading an article that can make people think. Also, thank you
for allowing for me to comment!
I’m truly enjoying the design and layout of your website.
It’s a very easy on the eyes which makes it much more pleasant for me to
come here and visit more often. Did you hire out a designer to create your theme?
Superb work!
WOW just what I was looking for. Came here by searching for jaynie mae baker
Its such as you read my thoughts! You appear to grasp a lot about this, like you
wrote the guide in it or something. I believe that you could do with some percent to
power the message home a little bit, but instead of that, this
is magnificent blog. A great read. I’ll certainly be back.
I relish, result in I discovered exactly what I was looking for.
You’ve ended my 4 day lengthy hunt! God Bless you man. Have a nice day.
Bye
Hey there! Would you mind if I share your blog with my myspace
group? There’s a lot of people that I think would really
appreciate your content. Please let me know. Thanks
The articles and hyperlinks aare incredible so far.
Good post. I learn something new and challenging on websites I
stumbleupon on a daily basis. It will always be
helpful to read through content from other authors and
practice a little something from their websites.
Fabulous, what a weblog it is! This blog gives valuable information to us, keep it up.
Hello, I enjoy reading through your post. I like to
write a little comment to support you.
Hello, just wanted to mention, I liked this blog post. It
was practical. Keep on posting!
Good information. Lucky me I discovered your site by accident
(stumbleupon). I’ve bookmarked it for later!
This excellent website really has all of the info I wanted about this
subject and didn’t know who to ask.
Oh my goodness! Incredible article dude! Thank you so much, However I am
going through troubles with your RSS. I don’t understand the reason why I can’t subscribe to it.
Is there anybody getting identical RSS problems?
Anybody who knows the solution will you kindly respond?
Thanks!!
Thanks for your personal marvelous posting! I genuinely enjoyed reading it, you will be a great author.I
will remember to bookmark your blog and will often come back in the future.
I want to encourage you to definitely continue your
great writing, have a nice evening!
Thank you for sharing your info. I truly appreciate your efforts
and I am waiting for your further post thank you once again.
Great article.
Good day! Would you mind if I share your blog with my
twitter group? There’s a lot of folks that I think would really enjoy your content.
Please let me know. Thanks
Excellent article! We will be linking to this
particularly great content on our site. Keep up the
great writing.
Hey very interesting blog!
Thankfulness to my father who shared with me
regarding this blog, this weblog is really awesome.