4 Common Cost Reduction Mistakes to Avoid
4 Common Cost Reduction Mistakes to Avoid
June 1, 2020
Even before the global pandemic and resulting economic downturn, many major US companies were already targeting cost-cutting measures in 2020, according to Cheenu Seshadri, former VP of Strategy at Motorola. Companies like Ford and Office Depot had publicly announced plans to reduce headcount and close locations, while Uber and others were already shedding staff beyond initial projections. The underlying causes include greater competition and slower economic growth.
In the current economic climate, cost-cutting activity has skyrocketed. But after more than a decade of strong macroeconomic growth, are the current crop of business leaders prepared to make the right cost reduction decisions?
Seshadri, now Managing Partner at Three Horizon Advisors, recently sat down with Catalant co-CEO Rob Biederman to discuss why leaders should think about cost transformation rather than cost reduction and how they can deliver sustainable cost practices that improve productivity and growth.
Cost transformation adheres to three core principles:
- Refocusing the organization on strategic priorities
- Simplifying processes and eliminating activities that do not add value
- Strengthening the organization by building new capabilities
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Seshadri also laid out the four most common mistakes enterprise leaders make when crafting a cost reduction strategy.
Mistake #1: Thinking of Cost Reduction as a One-Time Event
It’s only human nature to think of your cost-reduction strategy as a single unpleasant experience, especially if employees are impacted. But while a one-time cost-cutting action may save cash in the short term, it may come back to hurt more down the road.
“It’s one of the fatal flaws of cost management,” says Seshadri. “What happens is in six months or a year these costs come back. If demand comes back it’s not a real issue, but you’re probably spending in areas that you shouldn’t be.”
An effective cost management strategy includes regular reviews of ongoing investments and strategies. As plans change or results come in, leaders need to adapt on the fly to the latest information.
Catalant POV: Effective strategy execution relies on rapid redeployment of resources to the areas that need them the most. Part of any effective cost reduction strategy should include resource management that gives leaders real-time insights into how the skills and resources at their disposal are being used.
Mistake #2: Spreading the Pain Uniformly
At many organizations, leaders attempt a “democratic” approach to cost reduction, asking all business units or functional areas to trim a prescribed percentage of cost from their bottom lines. This approach is a mistake, says Seshadri, because long-term planning means investing in areas most likely to drive growth — even in the worst of times.
“If you’re in a stable industry with a stable marketplace and a stable competitive set, this might not be a fatal mistake. But in a fast-evolving landscape where there might some businesses that are shrinking or new opportunities to address, or maybe you need to got to market with a different set of tools. If you cut costs uniformly, you’re going to miss out on opportunities to invest in the right places,” says Seshadri.
Mistake #3: Failing to Look at Fixed Costs
Especially in businesses with high infrastructure costs (airlines, telecommunications, retail, etc.), leaders are reluctant to even consider cutting fixed costs. This is a mistake, according to Seshadri, because these leaders are missing opportunities to generate large, sustainable cost transformation.
“More often than not, when these businesses go into a cost restructuring effort, they don’t look at fixed costs because they may include long-term contracts or other things that are difficult to change. It’s the hardest thing to do, but it clearly has upside if you’re willing to do it,” says Seshadri.
Catalant POV: Salaries typically account for 70% of an organization’s fixed costs. Moving part of the workforce to variabilized (in which people are identified and deployed based on the changing needs of the business) can significantly reduce costs without a drop in productivity.
Mistake #4: Ignoring Process Improvement Opportunities
Business leaders frequently miss the opportunity to improve processes during times of cost reduction or management, says Seshadri. This is a mistake not only because it could stall long-term growth, but also because finding new ways of doing things can mitigate some of the negative effects of cost reduction.
“If you can find process improvement opportunities, sometimes you can reduce costs without impacting customer experience or product delivery,” says Seshradi.
Catalant POV: Having transparency into the impact of key strategic initiatives is a cornerstone of process improvement across the organization. Check out our eBook, “Nailing Strategy Execution” for a guide on implementing a system of transparency across the organization.
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