With the worst economic scenario in decades - rising unemployment, reduced demand on a global basis, a fragile financial system, and tight capital markets - cutting costs is on the front burner for many North American companies. Some corporations are making cuts to bolster their profit margins or retain market share, while other firms seek to remain economically viable. There are many ways to achieve cost-cutting, depending on a company's particular circumstance, but it's critical to go about it without cutting your company's throat.
For Menlo Park, California, startup Center'd, a firm that specializes in helping people plan all their life activities, it's a matter of cutting costs to extend the funding runway and ride out the current financial crisis. "First and foremost, be quick and decisive," says Jennifer Dulski, the company's co-founder and chief executive officer, who saw rounds of cost-cutting while in various senior executive roles with Yahoo!. "These decisions are hard to make, so don't fall into the trap of going into the avoidance mode. You must be present to win."
Dulski stresses that "the big line item, people, is the first area to be analyzed. You need to understand the difference between `must have' vs. `nice to have' positions/roles." She advises analyzing each position that is critical as if you are just starting your business from scratch and deciding how to staff it. Then make sure you have the highest quality people in those positions. Dulski also warns against the temptation to cut marketing staff without thinking through the baseline marketing needed to get your message across to attract and retain customers. "It's cheaper to keep customers than replace them," she says.
Acknowledging that it's hard to keep spirits up and maintain the corporate culture during tough times, Dulski advises offering creative ways to maintain that bond. "Instead of expensive corporate functions such as holiday parties, we have an employee-planned field trip that costs virtually nothing or take on a community volunteer project together that keeps our sense of unity intact."
"Before you begin cost-cutting, it's imperative to undertake an organizational diagnostic," says Anthony Urbaites, president of Louisville, Kentucky-based Aurum Consulting Group, which specializes in cost-cutting, process improvement, and turnaround services. "Review your company from stem to stern so you know where to cut. Some of the pitfalls involve either not taking enough action or taking too much."
Like Dulski, Urbaites sees fertile ground in labor costs since they typically amount to the largest single expenditure. He considers the sales forces as one of the biggest opportunities for cutting costs because over time, he says, the sales force becomes complacent and the bonus structure gets out of whack with economic reality. He advises looking for people nearing retirement and offering them buyouts coupled with part-time positions. "The net result often boosts productivity while cutting costs," he says. "It's a win-win situation for both the company and the employee." He warns against blanket cuts, advising decision-makers to analyze what experience and customer relationships walk out the door when a specific position is cut.
Reducing Incidental Expenses
Urbaites believes trade shows offer a big opportunity to trim costs without cutting people. A per-day budget for trade show costs, including per-diem expense limits for salespeople, helps employees focus on what is absolutely needed to get their marketing message across. Shopping freight shipping rates also makes good sense, since many freight companies have yet to reduce their rates in light of the drop in fuel costs. Along the same lines, he says, communication costs have dropped significantly over the past few years, so regularly comparing telephone and other communication options promises to bear fruit in reduced costs: "We see between 11 to 12 percent reduction in telecommunication costs if shopped every 18 months."
Urbaites recommends having your accounting department run an accounts payable log sorted with the highest expenditures listed first. "You'd be surprised how much you are spending in some categories," he says. "Ferret these out and analyze why costs are so high and find solutions for cutting them without negatively impacting operations."
Management at Coastal Contacts, Inc., a Vancouver, British Columbia-based online vision care supplier, focuses on applying Japanese lean 5S - sort, set up, standardize, shine, and sustain - workplace organizational strategies to streamline its back-office operations and reduce paper work, files, and checks. While lean concepts are routinely implemented by manufacturing operations, they have not been so readily adapted in administrative areas. "I helped implement the 5S concept at my previous company and am now implementing it at Coastal Contacts in the administrative/financial area," says Nick Bozikis, the company's corporate controller. "We anticipate cost reduction benefits and improved efficiency." But, he advises, "Make sure you don't cut out double checks to maintain good financial controls."
Lori Reiner, a partner with the CPA firm of Amper, Politziner & Mattia in Philadelphia, advises getting a good grasp on cash flow with a moving 13-week cash flow analysis and in-depth study of expenses and revenues. "You need to know where you are and the scope of the problem to know where you are headed," she says. "You can't turn off the marketing initiative. You need to fine tune what you are spending for marketing, but it's the last thing to cut when you are facing a slowdown. The pie is not getting larger; you need to position yourself to take a portion of someone else's piece of the pie."
Tom Glancey, CFO and controller of general contractor Wolfe Scott Associates, says his company is experiencing a significant slowdown. "We're still spending the same amount for client gifts, but the amount spent for each gift is less, without reducing the quality of the gift, and we are giving to more people. Thus, we're expanding our marketing reach and presence on the same budget," he says. "We are also hosting lunch seminars with clients to keep in touch with them and let them know what we can do for them."
"Using a prize fighting analogy, I'm not a big believer in trying not to get knocked out," says Ron Hequet, a principal with Actum Consulting in Fort Worth, Texas. "I advocate a more positive, aggressive approach to the current business slowdown. People's experience and training aren't grounded in cost-cutting.they're based on creating growth and gaining market share." However, he says, there are several key areas that need to be addressed. First, analyze the infrastructure required to be open every day regardless of your size and volume. Second, assess the talent needed to support that infrastructure. Third, review the amenities - magazine subscriptions, free bottled water, etc. - your company provides that do not directly add to the goals of the organization. "All companies have economies of scale," he says. "Eliminate non-critical job functions or double up duties of some employees to cover critical functions. However, make sure you don't remove required `expertise' positions."
Michael E. McGrath, a Texas-based business consultant and author of Decide Better for a Better Life, advocates timing-based decisions. "You need to know why you are cutting costs. Cost-cutting for combating cyclical trends takes on a different form than if you are cost-cutting for permanent downsizing," he says. "I've seen so many companies struggle with strategic decisions. It's not just about making the decisions, which is difficult enough, it's also about knowing when to make them. Strategic decisions are those we need to make today to achieve something we want in the future."
David A. Fields, managing director of Ascendant Consulting, LLC in Ridgefield, Connecticut, advises a sophisticated "de-bottlenecking" strategy that targets your overall system to keep things flowing. "Don't confuse this with lean. You can over-lean your company to the point that any hiccup can prevent your ability to react," he says. "You need to analyze your system to determine what is constraining output and causing higher costs. Removing bottlenecks can create higher output at lower costs, but you need to trace your changes throughout the system to make sure the bottleneck just hasn't moved down the line, still negatively impacting operations."
Fields believes that most companies use the wrong metrics to measure performance. "You require non-financial metrics to track the progress of your firm," he says. "The `net preference' metric - the likelihood that customers will choose your product over your competitors' - is perfect for tough times. If you focus on making your product better, more attractive, and more attractively priced, your product will be purchased and your financial goals met. It's a whole new way of thinking."