Tuesday, October 21, 2008

Cost Cutting Best Practices in a Tough Economy

When times are tough, companies want to cut expenses to help profitability. The measure of their business acumen during these difficult times, however, will not be the size of the cuts made, but the wisdom employed in making them. Companies often become “slashers”, cutting spending in just about every area and penny pinching their way through the downturn. Random slashing, however, should be cautioned because it could lead to a paper-thin workforce with limited resources, organizational “depression” that lends itself to a culture of fear and irrationality, and loss of the company’s strategic focus as a necessary stabilizing force.

Here are some best practice tips recommended by the Maver Management Group to our clients and used by many successful businesses.

First, it has to start with a sound business plan. Revisit the organization’s strategic plan to re-examine the future direction and the manner in which resources, such as capital or people, will be allocated in light of the current economic times. Most organizations develop a business plan that includes plans for resource allocation over time, as the organization becomes more financially sound. The right plan is even more important during the downturns as it will determine not only the success during this period but also the future success based on the decisions made. Maintain strict focus and avoid distractions. Be prepared to allow for a certain degree of tweaking, tinkering and testing on an ongoing basis.
There are some common techniques which can be used for strategic analysis. These include a SWOT analysis, which serves to detail the organization’s strengths (S), weaknesses (W), opportunities (O), and threats (T). Having an outside perspective can help companies see the big picture before they get deep into the details. Maver Management can help!!!

Second, the organization needs to communicate the strategic plan. This communication must be clear and concise. If business leaders are feeling very stressed about the company’s future, every employee will feel it too. Employees may start worrying about the stability of the company and will start looking for other job prospects. Covering up the situation only serves to push employees away even faster. Share the financial and let employees feel some “ownership” for the business.

Third, change the way people work. Instead of just cutting, look at the way people work and change the processes. The business plan can provide direction of what is actually needed NOW and not what was thought to be required in previous times. Identifying and focusing on the top priorities can reduce costs significantly. Since the employees understand the plan they can be significant contributors to the cost savings ideas. They may have ideas that will save costs by working in a different manner and not losing the impact of the work.

Fourth, outsource non core functions. According to a survey by Accenture, 80 percent of executives said their companies were able to cut costs, improve efficiencies, enhance customer service and revenues, or improve competitiveness with supply chain management initiatives. The survey revealed the integral role the Internet plays in supply chain management success. More than 70 percent see the Internet as one of the most important factors in facilitating greater collaboration with key trading partners because of the visibility it provides upstream and downstream in the supply chain. Creative partnering agreements that move beyond traditional time and materials agreements can be a means to identify more cost effective solutions. Suppliers can bring new expertise and insights.

Fifth, look at the proposed projects in a different way. A good project, plan or program is good even if you cannot afford it right away. Cut up a major project or program into more manageable bits, or less expensive steps. This strategy allows the company to stay committed to the program in a changed environment of cost containment. It may be possible to add ROI to a stalled plan or program from elements such as lower insurance, lower liability, less overhead and-hardest of all, lower losses. Companies often forget that a fully cut program takes with it the expected revenue and that hurts profitability too.

Sixth, reductions in force or staffing cuts are often necessary based on all of the elements above but should never come first. Look at the other elements first. The replacement costs and the lost IP from staffing cuts can be enormous. Lay-offs or salary reductions can definitely reduce overhead. The million-dollar question is: whose salary is the first to go? Strong-willed companies often realize that high executive compensation just doesn’t make sense during an economic downturn. This will be a thorny issue and can best use some unbiased help.

Finally, look to a reallocation of some of the costs to counterintuitive spending on the revenue side. Increasing expenditure when everyone else is rationing may seem contradictory to the recommendation of traditional cost-cutting. On further analysis however, there are three specific areas where increased spending is actually investing in your business’ future and can keep the organization stable. First, use technology to reduce overhead; second, invest in your employees and last, increase your marketing expenditure.

Here is a summary of costs you should be wary of cutting:
Accounting and audit services. In tough times, you must keep on top of your cash—and to do this, you'll need top-notch financial reports, timely tax filings and solid trend information.
Advertising. Advertising is your lifeline to sales. It helps keep customers informed about what you have to offer and helps you turn over inventory.
Collections. Turning your receivables into cash is one of the best ways to weather a cash crunch. Many of your customers may be short on cash too, and may want you to wait for your money longer than usual.
Customer service. Never skimp on relationship building. Decide how you can make your service more personal during hard times and you'll build a following of loyal customers when you need them most.
Information systems. Whether manually operated or computerized, good information systems help you monitor the health of your business, the work of your employees, the movement of your products, and much more.
Insurance. Insurance protects you from a wide variety of catastrophes, human and natural.
Intangible benefits.. Be wary of cutting relatively low-cost benefits that have high symbolic value for your employees.
Marketing. Marketing more broadly attempts to help you match existing and new customers to your products. Aggressive marketing might be one of the few ways you'll attract new customers during hard times.
Training. Unfortunately, managerial and employee development is often among the first expenses to be cut when money is tight. Yet, if you carefully select training programs, seminars, college courses, books and tapes that focus on business growth and productivity, you may find these training resources becoming one of your best survival tools.

If you are struggling to keep profitable, or frustrated by the cost cutting that you have to make, or wondering “now what” after the fat has all been trimmed, call us. We can help you meet your goals. We have helped many other companies and they sleep better at night now.


John Maver
Maver Management Group
(925) 648-7561
Maver Management

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