The Cost Reduction Mantra And Me

The Cost Reduction Mantra And Me

Hi and welcome to our blog regarding the Cost Reduction Mantra And Me! If you haven't heard the mantra then it is only a matter of time before you do. The mantra takes many forms and has been presented with confidence, optimism, with redundancies, with restructuring, with good intentions and ultimately it is the same goal with different endings. There is one fact that eludes some businesses, if you are not careful you can take this mantra too far. The question you need to ask when undertaking cost reduction is, does this result in real value? This is not necessarily dollars and often businesses excuse going too far as already declining revenue that they have no control over.

So how do you strike a balance between cost reduction and value to make this a successful result? Let's be honest every business is different so there is no magic equation but there are a few truths that should be acknowledged.

  • Accountants are great at identifying where there is potential to save but they should not be responsible for deciding to cut costs outside their control. What does an accountant know about the impact of making changes for other departments?
  • Cost Reduction is best achieved when cost reductions are planned before they are required, knee jerk cost reductions are generally rapid, ill considered and can often cause side effects that create secondary costs burdens that exceed the value of the reduction.
  • Cost Reduction measures need monitoring to determine if they are actually resulting in a cost reduction or are creating a secondary cost burden. i.e. stop servicing your car results in upfront reduction but secondary costs are created through reduced fuel efficiency, damage/wear and depreciated value.
  • Track revenue against cost reductions that affect clients and obtain feedback from customers before and after changes. A great example is where businesses make food products and change the recipe or portion size yet keep the cost the same or reduce it slightly. There is no point producing a product for cheaper if customers don't like what you are making, remember that dissatisfied customers can result in new competitors entering the market not just a reduction in revenue.
  • A temporary cost reduction is one that has an end date and these should only be used when necessary and secondary cost burdens identified. It is important to ensure that you do not place the business in a position where it cannot recover after the temporary relief has been accessed.

So you can see that when we talk about value then we talk about sustainable cost reductions, temporary cost reductions and what businesses should consider. The other part of this equation is your workforce who must embrace the cost reductions and who are generally responsible for executing these changes. There is no point instigating a cost reduction that tightens spending for example which then reduces your workforce productivity due to complex spending requirements that actually cost you more. This is why the term value is used, the cost-benefit needs to demonstrate that the cost reduction results in a benefit which can be measured. If the cost reduction will invite pain to your workforce then you are best to communicate the motivations than hide them as the workforce has become increasingly unforgiving for unjustified pain without noticable benefit.

The one key mistake that I have seen by much larger businesses is the execution of "cost reduction" measures which aren't monitored in any other way other than through direct cost. Without fail, measures are rolled out at short notice in a knee-jerk response to falling revenue without an actual plan, without regard for secondary cost burden and it is simply because these are considered to be problems for someone else. Once-of cost reductions become immediate savings without consideration for secondary costs or are temporary but don't have an actual end date for reversal you are likely in that "too far" realm. This is usually because unless your revenue can increase to exceed the secondary costs you are likely impacting on your business more than if the reduction hadn't taken effect. Another common mistake that most businesses make is that they make cost reductions a key performance indicator for employees and unfortunately this will result in the employee making cost reductions to make their target without consideration for your business. Whilst I have seen enough to say this is the case I would suggest you also have a read of a recent article released by the
Age Online Newspaper

So the crux of the matter is that cost reduction is what every business strives for as it means greater profit margins. All I think that needs to change is to ask if the cost reduction is needed, if you need one then what will you cut, if you make a cost reduction will this result in real value and at the end of the cut are you likely to see your workforce unproductive or leave the business. Let's not forget that if your business operates lean and mean then you are potentially also stifling business growth. If the cost reduction mantra has reached your business and you find yourself asking where do I start then maybe ActsIntuitively can help you with this. If you are interested in finding out more about what we can do for you then please feel free to visit our main website or contact us. Thank you for your time, for reading our blog post and it would be great if you feel the need to share or like our articles via one of our social media platforms with the @ActsIntuitively tag as applies.

Brent Webster
Technical Services Manager

Bunbury, Western Australia

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Outbound Links:

  1. The Age - Metrics Obsessed Managers Should Be Careful What They Wish For Unlike The Banks

  2. Bloomberg - Nestle's New CEO Challenges Food Industry's Cost Cutting Mantra

  3. Change Factory - The Cult Of Cost Cutting