I’m getting increasingly fed up with the number of people who think the route to making an organisation more cost-efficient is to make a series of catastrophically stupid decisions.
Of course, that’s not what they think they’re doing.
They imagine they’re some swashbuckling commercial genius. However all they’re really doing is hastening the demise of their organisation – often in a pretty spectacular manner.
The cumulative effect of a series of short-term, penny-wise pound-foolish decisions over even a fairly short period of time can be catastrophic.
If you doubt me, look at just about any decision a politician has ever made. Ideologically-driven, short-term decision making is a politician’s best friend. It lies at the very heart of political life.
But it seems to be catching.
Nowadays large organisations pay millions of dollars to fancy consultants to help them make penny-wise, pound-foolish decisions.
Billionaire social media owners are getting into the game with their own unique take on how to help governments save money – which mostly have the opposite effect.
And any business who proudly tells you they are going “AI-first” and intends to replace all their humans with robots is almost certainly making exactly the same mistake.
In every case, they brandish numbers and spreadsheets above their heads like weapons. But without really understanding what the numbers mean.
It shouldn’t be a surprise, perhaps, but the seemingly-endless ability of people to pull randomly at a bank of “cost saving levers” without understanding the consequences of what they’re doing is more than a little dispiriting.
So, if your bottom line is under pressure and you think the time has come to launch an organisation-wide cost cutting plan…or in the unlikely event that you’re a politician capable of reading beyond the level of a 5 year old…here are 5 common traps people fall into when they move into cost cutting mode.
If you want to avoid dumb, penny-wise, pound-foolish cost cutting decisions in your business, which end up making everything worse than it was before you started, then read on…
1-You’re not actually cutting costs
If you think your mission is to cut costs, you’ve lost the battle before it’s begun.
You should be trying to build your bottom line – and while cutting costs is one way to do that, it’s far from the only way. And often not even the best way or fastest way.
While there have been occasional exceptions over the years, I have almost always found that increasing revenues improves your bottom line a lot faster than cutting costs ever will.
Now, you might tell me that you operate in a highly competitive market and couldn’t possibly increase the amount of money you charge your customers.
Respectfully, that’s nonsense.
All that means is that you haven’t done a good enough job of demonstrating value to your customers, to make them willing to pay you more.
Or that your service is unreliable.
Or that your customers don’t trust you to have their best interests at heart.
If any one of those factors is the case – much less all of them together – you need to fix those issues before you do anything else. Even if you need to spend more money.
And if you think you can’t, because the pressure to save costs is too great, I can guarantee that cost-cutting in these circumstances isn’t going to solve your problem.
You’re already in a death-spiral because you’ve drifted into being the supplier of last resort. The one people only buy from when they can’t get something similar from somewhere else.
Which is a problem because, to build your bottom line, you need customers who willingly hand you their hard-earned cash in return for the goods and services you sell.
If all you’ve got is customers who only buy from you when they don’t have a better alternative, the only question is how long you can hold off the inevitable decline into irrelevance or bankruptcy.
In terms of surviving as an organisation, never mind thriving as one, you need to fix that problem long before you worry about your cost base. Cutting corners to do a poor job slightly more cheaply than you do at the present is not the miracle cure some dumb cost-cutters seem to think it is.
2-Think about positioning
There is a small chance that you might be right, and your customers won’t pay more for what you provide.
But even that is a mental trap organisations fall into far too readily.
If it’s true at all, what this usually means is that the group of customers you have chosen to serve will not pay any more for the products or services you provide.
So, the best, fastest, easiest, and cheapest route to boosting your bottom line might well be to find a different group of customers who will happily pay more.
Or you could provide something different to your existing customers – if your products or services were more reliable, or delivered results faster, or solved a bigger problem for your existing customers, might they be prepared to pay more for them? Odds are they would.
And if you can charge 30% more, but only increase your costs by 10% in the process, odds are that any bottom line problems you thought you had will solve themselves without you having to do anything more,
In most of the business transformations I have led, switching the positioning of my organisation, or the services we provide, in some way has been at least a part of the eventual bottom line transformation.
And since switching the positioning is mostly a switch in mindset, it’s a remarkably fast and inexpensive way to make significant changes in your operations.
If you think switching your positioning is unlikely to be worthwhile, or even possible, just remember that the super-luxury sports car maker Lamborghini originally made tractors.
If in Italian tractor-maker can successfully turn themselves into a super-premium, aspirational sports car brand, whatever transformation you might need for your business starts to look like a piece of cake by comparison.
3-Go outside
Let’s go outside, in the sunshine…as George Michael sang.
OK, maybe don’t think about that metaphor for too long. It’s a great song, and an even better video, but given the song’s subject matter, don’t follow George’s advice too literally.
What I’m getting at here is the tendency of organisations to think they are solving a problem which takes place entirely within the walls of their own factories or offices.
I can assure you, that’s completely untrue. Not “going outside” scuppers many a cost-cutting programme in the wild.
What I mean by “go outside” is talk to your customers and your suppliers. They will give you a perspective on your business you will never get from endless meetings in a windowless conference room inside your offices, with only your own employees in attendance – however well-meaning and hard-working they may be.
For extra bonus points, track down people who used to be your customers and aren’t your customers anymore. They are far more likely than any other group of customers to give you the unvarnished truth about what really cheesed them off about dealing with your organisation.
Ask the right questions and your customers will tell you exactly where you’re going wrong.
Put right whatever they tell you and odds are you’ll both sell more to those customers and you’ll also be more cost-efficient at the same time because now you are crystal clear on exactly what your customers want, and can focus your efforts on delivering exactly that – no more, no less.
A lack of clarity, sometimes manifesting itself as trying to juggle too many competing agendas at the same time, increases your costs.
Bring clarity and you might be surprised how much your costs reduce, and how little effort it takes.
4-Walk the floor
I guarantee every single person in your organisation knows at least one unnecessary or unhelpful thing your organisation does which increases costs, reduces service levels, or undermines quality. Sometimes all three.
It won’t be obvious from the executive suite or the boardroom because the original idea will have been proposed in a board paper with lots of slides, accompanied by charts and graphs galore, and spreadsheets full of data.
It’s only on the shop floor where it becomes obvious that, however well-intentioned the original decision was, it holds your organisation back, and increases your operating costs. Either directly in cash terms or indirectly in poorer service and reduced quality which both cause problems which later cost you money to fix.
My golden rule here is to investigate everything – no matter how unlikely-sounding – and make sure I report my findings back to whoever mentioned the concern in the first place.
Not everything someone tells you will be 100% accurate, but it’s rare that there isn’t at least a grain of truth in what they say.
Someone might raise the issue of their equipment being unreliable and think their boss is either an idiot or in the pocket of some second-rate supplier. But their boss might be operating within an inadequate budget set by the Finance Department and doing the best they can, in the circumstances.
In the same way as you can’t see the shop floor from the boardroom, people on the shop floor can’t always see the intricacies of your organisation structure clearly from their end of things either.
But what they can see very clearly is how those decisions – however good or bad – are affecting their ability to do their job.
Start there, and a nugget from someone on the shop floor – even if it isn’t the full picture – can be the starting point in an investigation which gets you to the root cause in the end.
Ask the right questions on the shop floor, and you’ll never be short of ideas to reduce costs and improve service for your customers.
5-It’s all relative
You shouldn’t be trying to reduce costs in absolute terms. You should be trying to reduce costs in relative terms.
Specifically, you should be trying to reduce costs per unit of productive capacity…whether that’s “productive capacity” in a factory operations sense or, for example, the number of chargeable hours in a day a lawyer has for doing client work.
If I have two identical factories, which each produce 10,000 units a day, I can reduce costs in absolute terms very easily.
I just close one of the factories, and all the costs associated with that operation will disappear.
However, at the same time, I’ve also halved our productive capacity which might not sound like such a bad thing, except now your organisation’s overheads are almost certainly far too high relative to the much-reduced income it can now generate.
Looking at this situation the other way round, you could probably hold your overheads more or less steady while adding a third factory, which would increase your productive capacity by 50%.
Now you’re spreading your overheads across a much larger number of units of product and you can either reduce your prices a little to be more competitive in the market, thereby attracting more customers and keeping your factory working at maximum efficiency through generating economies of scale, or you can keep your prices the same as they were before and increase your profit margins instead.
So in all your cost cutting decisions, if you don’t factor in the impact on your productive capacity, you’re making a big mistake.
A while ago, I worked with a professional services firm who – in a cost cutting move, allegedly – dramatically reduced the number of administrative staff they had.
Someone thought that was a swashbuckling cost-saving move, but the reality was that the fee-earners were now billing a lot fewer hours each day because they were doing their own photocopying and sorting out their own filing.
Given that a single billable hour for a fee earner in this organisation was far greater than the cost of hiring an administrator for a whole day, you don’t need to be super-efficient in your administration for the decision to re-hire more administrators to be a very smart move for your bottom line.
Absolute costs went up, of course. But billings per fee earner went up dramatically, and relative costs per hour billed went down…way down.
If you think you’re cutting costs, firing administrators sounds like a smart thing to do.
But if you think you’re trying to boost your bottom line, that strategy makes no sense at all.
So, if your bottom line is under pressure, try to resist the desire to engage in a round of dumb cost cutting.
The fact that politicians, social media billionaires, and tech bros all think it’s a great idea doesn’t mean it is.
Tread carefully, and try to make sure you keep away from the temptation to do whatever everyone else does.
Because, mostly, cost-cutting is a job that’s done extremely poorly who don’t really understand what they’re doing – their only objective is to get the number on a spreadsheet to become a smaller number.
And they’re not usually too fussy about how they do it, as long as they’ve moved onto their next job before all the chickens come home to roost.
But if you’re in your business for the long haul, dumb cost cutting is about the…erm…dumbest thing you can do.
Every time you’re tempted to cut some costs in your organisation, check the five dumb cost cutting traps above, and make sure you’re not about to fall into any of them.