7 Principles of Effective Cost Reduction
Implementing effective cost reduction is an imperative for any organisation if it is to fund future growth. It’s not acceptable to target a mere 10 percent reduction, when your target should be 20 percent within 18 months. This article explains why cost reduction essential, and it explores the core principles required to succeed.
Cost reduction in Plc. or SME: two sides of the same coin
The time is now! Whether you work in a publicly listed company or a small to medium enterprise (SME), the drivers – and challenges – remain the same. For the publicly listed company, the threat is from activist hedge funds who deliver the cost reduction ultimatum coupled with the threat to replace the management team for non-performance.
For the SME, the pressures are similar, except they must answer to their fellow directors, lenders, and suppliers. Very often, the directors have their own equity on the line – their homes, for example – and so the pressure is even more intense.
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Most organisational initiatives fail because it’s too easy to procrastinate. With staff changes across all levels, and the fear of being the turkey fattened up for Christmas, there’s a natural disinclination to drive staffing efficiencies if your own head might be on the block. This holds true for senior management, such as the Finance Director who fears automation might reduce their number of direct reports.
The conventional approach to transformation
Two thirds of businesses use a conventional transformation approach to cost reduction, reducing discretionary spending, and adopting lean-process strategies. There will be simplifications to the product-mix, and vague efforts to source lower-cost suppliers.
Outsource and consolidate
Infrastructure changes will incorporate some degree of outsourcing, shared services, and perhaps a reduction in footprint, whether that’s through the closure of unproductive satellite offices or the relocation of the company’s headquarters.
Increase prices and reduce cost of sale
Increasing margins by limiting discounts is undoubtedly effective, whether you’re B2B or B2C, and price increases need not always be feared. That 5 percent increase might not scare off as many of your clients as you expect, and if your cost of sale is reduced by the same margin, then you are half-way to success.
Negotiate with your suppliers
It’s clear that supplier negotiation is central to cost reduction, but mere brute negotiation is only part of the equation. What’s overlooked in the United Kingdom, and yet is so successful in Germany, is negotiating early payment discounts.
If your goal is to deliver a 20 percent reduction in costs, and an early payment discount can be with 4 percent – that’s 20% of your target – then you need to equip your own accounts receivables team with the tools they can use to get your organisation paid promptly too! This is perfectly achievable through the deployment of an Accounts Payable automation software suite: if you’re saving 90 percent of your current expenditure on A/P, then you can focus on your A/R with devastating effect.
The bold transformation
Fortune favours the brave, and bold decisions deliver the most profound cost reductions. You’ll move headlong into outsourcing and offshoring, to deliver 40 percent savings on direct FTEs. Broadly speaking, the majority of organisations should not be employing software developers unless they’re a software development company: if the task isn’t part of your core business, then it should be outsourced.
Office automation and RPA
Whether in-house or outsourced, the use of office automation and process automation (often referred to as Robotic Process Automation, or RPA) will feature highly, as will realigning wages to match the current economic reality.
The bold approach will also encompass looking at unprofitable accounts and shedding them, once the true cost of servicing those accounts has been understood.
Blanket budgetary reductions
Blanket approaches such as a directive to halve IT spending can increase risk if poorly managed. For example, reducing investment in cyber security would be foolhardy for the majority, but what if that same directive prompted a shift from on-premise to cloud / SaaS models to contribute to the savings?
Middle management is wasteful, and too often results in ‘busy’ people who produce very little. Be wary of the Sales Director who excels with spreadsheet forecasts, and yet doesn’t carry a sales target. Ask the salespeople where their days each month have been spent, and perhaps you’ll discover that they’re reporting to their director on what they hope to achieve versus actually being ‘out there’ achieving it.
Cut headcount early
This second principle reduces to this: cut headcount early. Where there are gaps, the remaining staff will rise to the challenge and, with the right encouragement, will propose innovative solutions, some of which will be technological, and some will be process driven.
Foster a ‘can do’ culture
Your goal is to foster a ‘can do’ culture of highly motivated employees who feel rewarded and appreciated. It’s surprising to many in senior management how stifled key workers may feel within the current constraints of their roles and by lifting the barriers, employees can flourish.
Blanket budgetary cuts aren’t productive when compared to considering all expenditures and considering the value they bring to the organisation. Move from department to department, examining all expenditures and questioning their value-add. Look at the long-term plan, say over five years, and consider the return on investment for each expense category.
The legacy system trap
Perhaps you have legacy costs, such as a server which hosts the obsolete ERP or CRM system. Does anyone use it? Is it there as a ‘nice to have’, or could that data be migrated to a different platform and the legacy server and associated maintenance be terminated?
Every management team has its regrets, and it’s fair to say that few business owners or CEOs would have followed the same path if given a second chance. The key now is to avoid the blame game so that even the manager who selected a specific expense, whether it be a piece of machinery or a suite of software, can say, ‘it’s time to resign this and replace with product ‘x’ immediately’.
‘We’ve always done it this way’ are the six most dangerous words in business.
Drastic cuts can terrify everyone employed, especially when you demand 30 percent knowing you’ll need to do this to achieve your 20 percent. This can be the time to modernise, move offices, and to tear down the barriers.
Does your corporate culture reflect the change?
Do your staff feel part of the rebirth, or is your corporate culture still ‘us and them’? If it is, and you’re in a suitable industry, is it perhaps time to cast off the suit and ties for company branded tee shirts and fleeces?
ESG and rethinking your corporate messaging
Environment, sustainability, and governance, (ESG), brings thoughts of efficiency foremost to our minds, such as using only energy-saving lightbulbs or EPEAT compliant office printers. But what if those relatively minor cost efficiencies can be converted into winning new clients? Can you project future revenues which might result?
Case in point: sustainability and law firms
The legal sector isn’t renowned for being progressive, but some UK firms have discovered that there’s a profound shift towards potential clients are considering the firm’s environmental track record as a factor as to whether they seek that firm’s representation.
Being an industry driven by paper processes, some firms have turned to their managed print service provider to offset their volume of print by using a certified reforestation scheme such as PrintReleaf.
While this introduces a negligible additional cost, the associated discovery process typically reveals cost savings in excess of 30 percent to be gained from rationalisation and upgrades to their print fleet, often amounting to many tens of £1,000’s annually.
Case in point: the environment and the education sector
In the same vein as law firms, Microsoft™ report that the average school prints circa 1m pages annually. With up to forty printers distributed throughout a school, and sometimes many more, the savings achieved through moving to EPEAT compliant printers can reduce electricity costs by 50 percent. When combined with print management software to reduce wastage, the print budget can deliver savings to some institutions of £100K annually. The result: a happier student population and parents more supportive of the governors.
Taking these universal examples, it may be understood as to how drastic cost reduction initiatives can become a benefit to the organisation.
There should be no assumption that any person, product, service, or even customer, is sacrosanct: the cuts must fall where logic dictates. Sometimes, the very foundation of the business must be called into question, such as when technology has rendered original product set obsolete.
‘We’ve always done it this way’ are the six most dangerous words in business, and for the traditional business owner or corporate executive, it’s always a rude shock when an upstart firm challenges their business.
The upstart has never used a rotary dial telephone. They don’t have any filing cabinets, company cars, and they don’t drive to meetings. ‘Remote working’ is all they know, and the pandemic lockdowns didn’t affect them. Desks? They’re modernistic prefab table tops from Scandinavia!
In terms of approaching cost reduction within your organisation, you must look at the start-up’s modus operandi and emulate what has proven effective. ‘Lean and mean’ and ‘Agile’ must become your mantra.
Of all of the 1,000’s of businesses with which the author has engaged over the past thirty years, there has been one common expenditure which has typified waste and the haemorrhaging of cash: paying humans to perform tasks so easily completed by computers.
Despite all of the technological advances over the decades, virtually every organisation employs staff to process invoices – literally typing information from paper and digital documents into their financial system. If not doing that, there are staff performing manual data entry, whether that’s in order processing or in compiling their monthly expense claims. Such tasks are devoid of satisfaction, and being so mundane as they are, they’re prone to errors.
Wherever there’s a routine process, whether document driven or, literally, digging a hole in a road, your cost cutting exploration should be looking for automation. Invariably, a well-engineered piece of software or machine will reduce mistakes, improve client satisfaction, and reduce your labour costs.
From being bold in your approach to automating the mundane, cost reduction is a multi-faceted topic. Moreover, the execution of your goals does not have to cause distress for your colleagues or your workforce, because the opportunity to modernise can bring rewards too.
Humperdinck Jackman – Marketing Director
Humperdinck has a 30-year career spanning Document Management Systems (DMS), data protection, Artificial Intelligence, Data Protection and Robotic Process Automation. With many articles published in print internationally, he believes the advances in office technology are such that we’re entering the 4th Industrial Revolution. Now Director of Marketing and Consulting Services at Advanced UK, he’s as active with clients as he is in endeavouring to write original blog articles.