This is an extension of my previous article on cost cutting. I thought of publishing it to offer my insights on how I arrived at the precautions (in my previous article), especially the three of the four thoughts I presented under “Precautions”. I’ve also provided the hyperlink to each of these two articles so that readers can easily steer and read them one after the other. Read my previous article on “Cost Cutting: Steps, Strategies and Precautions” here.
Precaution #1: If the CEO is not leading the project, it’s not worth pursuing it
In the past 2 years, I have helped organizations (up to US$ 50 million) improve performance, execute growth strategy and maximize their business value. In one of my assignments in India, I had the opportunity to serve one of my clients in the IT sector which had concerns with declining sales and operating margins. The President and CEO of this $33 million organization made a strategic move to expand their business to cloud computing, focusing on SME, USA. He made a directive to his Finance Manger to lead the cost cutting initiative and give him the updates on the progress such that he can concentrate on his business expansion project. Unfortunately, the Finance Head resigned to pursue opportunities outside the company, thereby forcing the Owner, President and CEO to delegate the cost-cutting project to his oldest employee, the next Finance Head. Being new to the job, the new Finance Head showed enthusiasm, commanding his team to meet the expectations of his new boss. But he committed mistakes on various lines, leading to a situation which the entire organization suffered.
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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.
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