A tougher market demands tougher cost control, but stepping back from your vision of ambitious growth can seem like failure. However, delaying cuts creates worse morale and eats up cash. So it’s better to cut harder and deeper as early as possible. The first serious cost-cutting programme can hurt, but it will improve your prospects of long-term success.
Good cost management, and a good low-cost business model are as critical as innovation, leadership and team-building, which get far more press. Google is a great example, matching innovation with low-cost IT infrastructure management. Like Toyota, Google is obsessed with eliminating waste.
Knowing how to conduct one-off cost-cutting programmes in tough times is highly relevant to the current economic climate, but cost management is more important, because it’s something you should always be doing.
Line by line
People costs are sticky. Once someone’s on the payroll it’s hard to get them off, even if they are poor performers. No one likes firing people, refusing a promotion, or telling staff they’re under-performing. And people issues are even harder for entrepreneurs than they are in large corporations, because you’re likely to be personally engaged with many of your employees, who may have stuck with you through previous tough times. Unlike BP or Wal-Mart, you may not have a professional human resources department to bring consistency and discipline to people decisions.
However, the tougher the market, the stronger the impetus to move on those firing decisions. Your high performers may seem shocked and upset, particularly while the termination process is going on – but once completed, the organisation will be released from dead weight. While you’re at it, use this opportunity to change your hiring processes too. Then you’ll have fewer firing issues in the next downturn.
Addressing wage structures can also prove useful. Tony Martin, chairman of internet directory company Locallife.co.uk, altered the way his 60 sales people were remunerated to cut fixed overheads. “In effect, they’re now paid on a commission basis, but we don’t put any limit on the upper earning potential,” he explains. “It’s an upfront
cost-cutting initiative.”
Locallife, which has an existing network of 324 local internet directories covering every town and city in the UK, is currently expanding in the US and across Europe, with a fully translated French site to go live soon. This aggressive growth programme required a dramatic change in the company’s strategy; organic growth has been replaced with a franchising network, which Martin sees as effective cost management. “You give part of the revenue away,” he says, “but it means you don’t have to go and raise the finance and dilute the shareholding to get to the same position.”
A company that has recently completed a merger is also forced to take a long hard look at costs. “There’s no better way of cutting costs than by going through them line by line,” says George Lossius, chief executive of AIM-listed Publishing Technology. “A lot of staff will tell you that there are no places where costs can be cut,” he continues. “You have to force those people to sit down and open up to opportunities.”
Publishing Technology was formed 14 months ago by the merger of Ingenta and Vista. “We set out a plan for immediate changes when the merger was complete,” says Lossius. “That included the closure of one of our offices in America that had low occupancy. Prior to the merger, we’d outlined a number of cost-cutting measures. We looked at the business as a whole rather than each division.”
Cross sharing staff across functions has been beneficial, as has a philosophy that makes no assumptions about the efficiency of previous business decisions. “We have quite a lot of offshore activity and looked at that again to ensure we were getting the efficiency that we wanted,” says Lossius. “In one particular area, we decided the overheads made it more expensive than doing it onshore.” This brought a 30% saving.
The company had two divisions operating in the UK and US which were pulled together as one. “A lot of our income comes from consultancy,” explains Lossius. “Increasing utilisation (billable days) for consultants is important, and by pulling them together we’ve managed to optimise the use of our own staff, reducing the need for consultants at peak times.”
Forgotten costs
Big corporations usually have procurement functions that make sure no piece of the cost structure gets overlooked in the search for efficiencies. You don’t have the scale to justify this, so you need to ensure you aren’t missing opportunities to cut ‘forgotten’ costs. Lossius’ line-by-line approach prevents this. “We had five offices, so we got rid of telephone exchanges and consolidated them into one through VoIP,” he explains. “We looked at our maintenance contracts and renegotiated them with one vendor rather than three. By going through costs line by line we rationalised our outlay on support and maintenance, and hardware purchasing.”
Lossius points out that cost management can also involve investment. “We bought new equipment so we could reduce purchased space in hosting centres,” he says. “We got a return on that investment in under a year.”
Martin advises putting end-to-end business processes under the microscope. “Automate, simplify and take out unnecessary steps in the process, because that’s where a lot of cost is consumed,” he
says. “We have the highest level of automation. The way technology is progressing, you can do some very smart things
to drive costs down.”
Once you have gone through the initial process, Lossius suggests doing it again six months later. “More opportunities will show themselves over time. Once again, force managers to sit down and address them.”
Intelligent cost management is not at odds with caring for customers, nurturing employees and investing in future growth. Just like Toyota’s ‘cheaper and better’ business model, all great companies should have the ambition to be both more efficient and to have superior customer propositions.
Andrew Wileman has 25 years’ experience of running cost-management and cost-reduction programmes in the US, Europe and Asia. His new book, Driving Down Cost, addresses the topic of cost management from strategy and leadership to the details of operational execution.
Key areas where you can cut back
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Travel – better use of
self-booking, low-cost airlines and budget hotels, plus web and phone conferencing to avoid travel
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Communications and IT – unit costs are coming down all the time, but you may not have done a supplier review for several years
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Professional services – market research, lawyers, accountants, surveyors, insurance and banking tend to be ‘inertia’ relationships that you rarely examine. However, if you challenge costs you can often renegotiate rates or find cheaper alternatives
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Office supplies and spares – freeze spending and you’ll be amazed how much inventory is sitting in cupboards
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Office services – with cleaning and building maintenance, go for a new tender process and question whether you need current standards and frequencies