A penny saved is…not much. Cost Savings in the Workplace.
Doing more with less is important in business, and even more important when times are tough. Managers, however, need to carefully evaluate every cost cutting decision to ensure that the costs being cut will not have too great of an adverse effect in the organization’s ability to do business, in the morale of its employees, and in leaving its customers and clients feeling cheated. If careful consideration is not made companies will end up spending less and getting less, or spending less but increasing its costs in other areas in order to operate its business.
3 Cost Cutting Traps
1) Focusing cost reduction on areas with highly variable costs. Advertising, training and recruitment are often hit simply because they are easy to switch on and off.
2) Seeking to give all areas of the business an equal share of the pain. For example, all departments may be required to find 20 per cent cost savings regardless of their relative importance.
3) Enabling a political power struggle. Departmental leaders many times use their influence with the CEO to campaign to protect their area, whatever the cost elsewhere.
3 Correct Cost Cutting Principles
1) Identify and protect your key profit generators. A profit generator is a business activity that has a disproportionately large impact on the profit and value of the organization. These business activities should have a focus of ensuring that they maximize their revenue potential for the long run and not just minimizing their costs. Not in check, this creates the cooking the “goose that lays the golden egg” syndrome. You, in your cost cutting efforts, cut back on the necessary resources your main income generator requires.
2) Understand where you are competitively disadvantaged on cost. Don’t just review your own costs to drive profits, you should also critically review and understand your competitors’ costs. If your competitor can cut costs in certain areas, can you do the same? If so, do it. If not, you will need to come up with an alternative area where you can cut costs to offset what your competitor is doing.
3) Determine where you make and lose money. A good starting point for increasing profit is to stop losing money. In most businesses there are areas of high profitability and areas of low returns or losses. Poor-performing businesses cannot be switched off overnight, but focusing your resources and effort where you deliver the greatest returns is likely to raise profits. Each of these areas, however, need to be carefully evaluated as to what the costs, in the end, bring to the company. Some costs can be cut with relatively little effect on the company. Other costs can minimize business potential, decrease morale, or even increase costs in other areas of the business.
Cost cutting initiatives in business are not easy or simple decisions. Managers who face the requirement to cut costs should carefully weight their options, seek for input from those directly related to the areas where costs will be cut. Most often, by involving others and explaining the reality of the situation, managers can seek for insight on areas where costs can be cut. Those employees who work in those specific areas day-to-day often have a wealth of insight into the business and can, many times, offer solutions to make the decision process more informed and better for the business.
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