It’s the first week after the Christmas break for most people. And if you’re like most people (OK, just me?) you probably overindulged a little over the break. The trousers or skirt you did up first thing on Monday morning, for the first time in a fortnight, were probably a little tighter than you remember them being just before Christmas, weren’t they?
That’s why there are so many ads for weight loss products at this time of year. Fad diets. Gym memberships. Healthy eating plans.
Many of these things come with bold, dramatic promises – “Lose 10 pounds in 10 days” or “Abs of steel in just 30 days” or “Get thin by eating only grapefruit for 28 days”.
Despite the fact that most sentient beings know in their heart of hearts those promises are, to put it kindly, over-ambitious for most people, a lot of products like those sell by the boatload in January.
Of course, by the end of January, they haven’t worked.
So we go quiet for a while, before the approaching summer holidays remind us we need to get “beach body ready” and the whole cycle of scammy ads and over-ambitious promises, followed by plunging disappointment, starts again.
Now, I can confidently say I’ve never been beach body ready at any point my entire life. Unless you like visiting the beaches where migrating walruses like to sunbathe, in which case my body is definitely ready for that beach. I’ll be the pale-looking Scottish one.
However, fad diets aren’t just restricted to your post-Christmas feelings of guilt at eating too much over the holidays. In a lot of organisations, fad diets damage your bottom line in a similar way, ending in the same inevitable disappointment as all those unfulfilled new year’s resolutions to shed the extra Christmas pounds.
So, if you’re serious about your bottom line, here are my tips for healthy cost control to get your bottom line health moving in the right direction for the new year.
Avoid the fads
As with fad diets, cost-cutting fads will take you down the same inevitable path of over-hyped promises and crushing disappointment.
The basic rule is if something sounds too easy to be true, it almost certainly is.
Over the years there have been plenty of faddish cost-control diets. The current one is AI, which claims to magically solve all your problems and reduce your cost base dramatically.
I can’t say this strongly enough – with very rare exceptions outside activities like managing datacentres or writing low-end code – it is a complete lie to say that AI will boost your bottom line performance.
The problem is that, by the time you notice, all your customers are likely to have taken their business somewhere else due to the difficulties in dealing with your business and the truly appalling customer service AI seems to be set up to deliver.
AI will inevitably fail (at least as a mass-market product – again, some specialist areas might well see some benefit), but don’t be disheartened. There will be another fad diet along soon…I’m not sure what it might be yet, but there will be one, I can guarantee you that.
Grifters always need something to grift, so when AI fails, they’ll just pick up the next grift as if nothing happened.
Staying away from fads means you’ll minimise the chances of doing anything stupid and, in the medium-to-long term, just not doing stupid things on a consistent basis means you’re almost guaranteed to be successful. (To paraphrase Warren Buffett’s long-time partner, Charlie Munger.)
Avoid short-term thinking
Any idiot can cut costs…and thereby appear to flatter the bottom line…in the short term. And, every year, that’s precisely what a significant number of idiots do.
I once worked for an organisation where the executive team patted themselves on the back for one of their number slashing marketing expenses to hit a profit target one year. The following year they couldn’t figure out why they had no customers.
You can achieve much the same results if you halt all the maintenance expenditure in your business. But don’t be surprised if your machine break-downs the following year cost you 10x more in engineering costs and lost production than it would have cost to get the scheduled maintenance carried out on your machines when it was originally supposed to happen.
Similarly, you can fire experienced staff and replace them with trainees to bank a massive “instant” cost saving.
Roll the clock forward a few months and I can guarantee you’ll be dealing with a mountain of problems you never knew existed because your old, more expensive, team just dealt with these things and stopped them from ever getting to your desk or cheesing off a customer.
To be fair to the trainees, they don’t know what they’re doing, so chaos ensues.
It’s not their fault (specifically, it’s yours) but chaos is never the sign of an organisation running at its most cost-effective.
Avoid more KPIs
A common reaction to cost pressures is to start tracking all sorts of data points in the hope that somehow, the mysteries of the universe (or at least your business) will be revealed.
While there is definitely an art and science to setting and tracking KPIs, it’s really unlikely that the lack of a KPI is the biggest problem affecting your bottom line.
It’s much more likely that there’s something more fundamental at play. Maybe your price point is wrong. Or you’re selling to the wrong target market. Or your product isn’t competitive with other offerings in your sector.
No internal measurement tool is going to tell you any of that.
But it’s possible – common, even – to compound this problem in a quite spectacular way.
Businesses often set up a new team just to track and measuring of things. That team needs all sorts of fancy software to do their job. Most of your management team is now tied up in meetings about reporting and KPIs instead of managing their part of your business. The cost is phenomenal, but the business thinks more measurement will solve its problems, so they go ahead anyway.
In those settings, I’ve only very rarely seen performance improve. Even then, it was only because the performance previously was so horrifically bad that almost any tightening up of processes would have delivered a positive RoI.
I mean, they still missed the point because the thing they did which made a positive difference might have been 27th on the list of things that would have made the business better, and they completely missed the 26 more powerful bottom line-enhancing strategies above it, but still…they had a positive impact on the business.
So what should you do?
If those are some of the things you shouldn’t do, what should you do?
Well, good cost management is (conceptually, at least) relatively simple. Here are three strategies I always recommend:
1-Manage for the medium term
Every cost cutting decision you take should be considered in a medium-term context, say the next 3-5 years.
If you cut your marketing costs to zero today, that’s not likely to have a positive outcome on sales in a 3-5 year time-horizon. So don’t do that.
Most of the very worse cost-cutting decisions can be avoided just by having a timeline which extends beyond this month or this quarter.
2-Consider the consequences
Have some idea of the impact of, say, a 5% reduction in your customer base because customers don’t like your new, cheaper formulation, or the fact they can’t talk to a human being on the phone any more.
While you might think of your cost base in the same silos you report in your P&L, your customers think of the total experience your company delivers. So there’s a non-zero chance that substituting a cheaper ingredient into your production process will cheese off at least some of your customers.
By and large, you shouldn’t do that. You’d be surprised how warmly some organisations congratulate the person who saved £50k in their department but overlook the fact that their actions cost the business £1million in sales when customers took their business elsewhere.
If the consequences of, say, 5% of your customers taking their business elsewhere would dwarf the benefits you bank from any cost saving idea, by and large you shouldn’t take the cost saving.
It’s tempting to think customers won’t notice, but in the end they all will…and some of them will be bothered enough about it to buy from one of your competitors instead.
Most businesses would lose money if just 5-10% of their customers stopped buying. So not considering the potential damage caused by cheesing off a relatively small proportion of your customer base isn’t wise.
3-Think cumulatively
In many organisations, cost saving strategies are set as “everyone has to save 10% in their department”.
It’s often forgotten that, from a customer perspective, those savings represent a cumulative downgrading in your products and services.
If you save 10% on the ingredients, 10% on the packaging, 10% on the logistics, 10% on the staff time to make the products, 10% on your overheads, and so on, you can easily end up with a customer’s experience of dealing with your business being only half as good as it was before.
So, unless you reduce your prices to reflect that (which would rather defeat the object), you have just made your business less attractive for customers to deal with. There are very few situations in which that’s a smart move, no matter how clever you think you’ve been in getting every department to save 10% from their budgets.
Stay away from fad diets for your bottom line
As for diets, the sad truth is that there is no magic way you can dramatically reduce your cost base overnight with zero pain and unlimited upside.
The only sustainable way to lose weight is to cut out junk food, eat healthily, and exercise regularly.
By the same token, the only sustainable way to build your bottom line is to develop reliable systems, resource them properly, and continuously improve the ways you look after your customers.
I’ll grant you, that’s a lot less glamorous than riding a white steed into your company’s car park with a big flag trailing behind boasting of a new magic solution to the cost pressures facing your company.
But it’s also the only sustainable way.
And a year from now, you’ll be vastly better off than your competitors who spent £000s on “magic instant solutions” in the meantime, only to end up, like every January’s crash dieters, pretty much where they started. Only poorer and more disillusioned.