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Cutting costs the right way
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According to a recent McKinsey Quarterly survey, 79 percent of all companies have cut costs in response to the global economic crisis—but only 53 percent of executives think that doing so has helped their companies weather it. Yet everywhere we turn to, organizations continue to cut. Most believe that cost reductions often go wrong and can be done in a better way.
Responding to a financial crisis has traditionally been done with a very short term focus. Organizations tend to cut costs across all areas without first developing a business strategy. A common error here is cutting head count by division, or by region, as oppose to key strategic functions or strong performers. Prolonged crises give way to further non systematical cost cutting to meet immediate needs, without a long term focus.
Usually a cost cut can be beneficial if done correctly. It can improve business systems, eliminate duplications, build new capabilities or strengthen teams to perform optimally. McKinsey suggested some non traditional ways to control costs such as considering both a reduction in the amount of space allocated to each person in the present location and a to promote work at home or a hub-and-spoke office arrangement. Also, renegotiating supplier or other long-term contracts can yield substantial reductions. Often overlooked, a company’s selling, general, and administrative costs are easy areas for making immediate cutbacks. Consumer driven businesses face a particular challenge to maintain those customer facing critical roles (such as in financial and retail sectors) for ongoing sustainability and profitability of the business. Therefore, it is important to identify which activities are essential for a distinctive consumer experience and which would be most easily damaged by cost cutting.
Tough times are usually the defining moments amongst competitors. Historically, large and small organizations that have responded to an economic meltdown in a systematic manner, where they have taken the time and investment to align their business strategy, human capital and innovation techniques, have not only survived, but also resonated to become the market leaders.
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