19th Ave New York, NY 95822, USA

Cutting costs in bad times and good times

kelly-sikkema-M98NRBuzbpc-unsplash

Cost-cutting initiatives can be dreadful for the management of the organization and the rest of the employees alike. It typically involves having countless discussions, dealing with frustration and disappointment, and abandoning beloved projects. So, it is not surprising that companies initiate systematic cost-cutting only as a last resort when bad times hit hard. Unfortunately, in such cases, they are also least likely to enjoy gains in the long term. Optimization and transformation are other reasons for cost-cutting, which, when implemented in good times, can strengthen organizational resilience and prevent entering into survival mode.

Survival

Trigger: Usually, an organization enters a survival mode as a response to an unpredictable future generated by changes in the market like recessions and shifts in supply and demand. The COVID-19 pandemic is an example of such a threat.

Your position: Your financial position is difficult and the main challenges that you encounter are the running costs that start eating your liquidity base. Because of low demand, you must lay-off a significant part of your workforce, cancel new projects, and delay the existing ones.

What you need: A quick win with results between today and 3 months.

How to do it: You will need to focus on immediate savings even if they are detrimental in the long term. An increase in working capital is a must.

Optimization

Trigger: A distress situation like competitors entering the market, new technologies that directly impact the business model or efficiency. In general, triggers for optimization are situations that challenge the company’s market share or generate liquidity problems.

Your position: The company is financially stable. The main challenges are aligning your processes and environment to the change. You are probably forced to freeze big investments and reconsider the medium ones.

What you need: medium-term cost optimization with results in 6-12 months

How to do it: You will need to make minor and moderate investments and start programs for technology adoption and business process improvement.

Transformation

Trigger: The growth is obstructed by the company’s structure and processes. For example, geographical expansion cannot be made by replicating the current business model due to the differences in costs and potential revenue.

Your position: Financially, your company is healthy and your main challenges are the need to innovate to keep up with growing demand. You must invest in new projects and a new workforce.

What you need is to create a healthy and scalable structure with visible results in 12-36 months

How to do it: You will need to make considerable investments in processes, R&D, and technology with tight control without expecting quick results. You need to be careful and not fall into the trap of chaotic, rapid growth, which cannot be sustained.

Regardless of the specific trigger, you require a multidisciplinary team across all key functions of your organization to attain significant cost reduction. Systematic support from the top management helps greatly. You will encounter resistance to the cost reduction efforts and there are risks associated, so the trade-offs should be carefully considered. The team needs to prioritize cost-reduction opportunities, assess the necessity of all costs and quantify projected savings. Furthermore, you need to identify implementation costs and risks for each proposed action, maintain an action plan, and monitor and discuss progress weekly to create and sustain cost reduction momentum.