Are Cost Cuts & Efficiency Gains the Same Thing? Where Should You Focus?

There is a lot of debate these days about the value or damage arbitrary cost cutting can bring to an organization.  The reality is that many businesses are faced with this decision due to rising costs and decreased revenues.  So what is the best way to create a rebalancing of your business that allows you grow, while surviving in today’s market?

The answer is not simply stated, but it can be simply mastered by leadership that educates and sets the parameters for efficiency gains.  Your best idea generators for improving the way you do business lie within your current employee base.  If they are incentivized to seek out efficient ways to improve the business, they will not only generate ideas, but they will successfully implement them as well.

5 Common Mistakes Businesses Make When Cost Cutting:

1) Business Leaders Set Arbitrary Cost Cutting Objectives for Every Department to Implement 

For example a 10% cost reduction.  Although this may sound specific, it is not.  Not when you leave it up to department managers to implement arbitrarily.

2) Headcount Reductions Resulting in Employee Layoffs or Job Eliminations 

Maybe you have some poor performers you can let go, but what typically happens is administrative support is eliminated instead of the weak performers.  Or even worse, lower seniority people are let go to ‘reduce headcount’, without enough understanding of the impact the reductions actually have on the business’s ability to function.  Large organizations are notorious for this mistake and as a result they go through multiyear cycles of poor performance because of it. 

3) Sales & Marketing Budgets Get Slashed  

This may give you some short-term gain but you can’t increase revenue without your sales team or without the ability to message properly to target customers.

4) Elimination of Employee Perks or Bonuses 

This may have some merit if perks are excessive, however employee moral is important to the business’s recovery.  If your first step is to destroy it, you are hurting yourself in the long run.

5) Stopping All Capital Expenditures and Investments

This is tempting, but again, if your investments are making your business run smarter, it does not make sense to push them off.  Instead, looking at them with a strategic eye may be a better approach.

Now that we have covered some common mistakes businesses make when cost cutting, let’s review an alternative approach to cost cutting.  Here are some things your company can do to avert financial distress while establishing a more strategic & profitable future.

Top 3 Ways To Improve Profits Without Increasing Revenue

1) Establish a New Cultural Mindset

Reward Efficiency Improvements…but first define the meaning of efficiency in your organization.  This is the single most important thing any business leader can do to improve their bottom line without increasing revenue.  Set the guidelines for employees and managers to spend smarter.  For example instead of setting the expectation that headcount in every department be reduced by 10%, set the expectation that every department manager must produce 10 ideas for efficiency gains within their department that will increase profit over a three year period.  I call this program an “Earned Profit Initiative”.  This profit must generate 10% to the bottom line each year and NOT include waves of headcount slashing.  As a matter of fact, if a manager came to me with headcount solutions, my reaction was to recommend his or her head instead.  Why?  Because that is not smart cost savings unless all other options have been exhausted.  As an employer, you have a lot invested in employees; they know your systems, your customers and your products/services.  They are vital to your success. 

2) Establish a Cross Functional Team to Tackle Major Efficiency Projects

For example, contract renegotiation.  Yes, I said it.  When times are tough existing contracts are on the table.  You don’t need to wait until a contract finishes to negotiate new terms, but in good faith you do need to give up some value to your suppliers, like an extended period of time.  Tough negotiations require experienced purchasing/procurement professionals.  Don’t shy away from paying top dollar for these individuals, they are an investment in your cost savings program.  You should expect these individuals to understand your business and work hand in hand with your cross-functional teams to understand the impact of current supply agreements and future needs.  In my view, a top notch procurement professional holds a spot on the executive team, but unfortunately for many company’s these individuals are not trained, nor do they hold any authority in the organization….this is a mistake.  I remember many moons ago being invited to attend a supplier conference for a tier two automotive supplier.  There were about 100 attendees, we were given enthusiastic tours, had great collaborative meetings and then were brought into a room for a presentation.  The president told us all to stand up say hello to the person to our right, and the person to our left.  Then said, “these are your competitors, and one of you is going to be able to achieve or exceed our 3%, 3%, 3% efficiency improvement expectation over the next three years.  They will be the one getting our business, not you.  So get to work.”….that was the end of the meeting.  Would your company know how to tackle that opportunity if faced with it today? …reducing price by 3% each year for three years, without reducing profits?

3) Invest in Short Term Efficiency Improvements 

Unfortunately, the last thing managers want to do is go to executives with a capital request after they have been told cost cutting measures are in order.  But if company leadership drives the program with smart spending and efficiency gains, they will get managers to find better ways of working that may involve smart investments.  The key is to have the impact of those investments pay off in the short term.  For example, investing in reusable raw material storage systems, online packaging or video conferencing systems.  Each of these eliminates the need to spend money and changes the way business is done.

Here are a few things to keep in mind when changing your company’s dynamic:

• Think of your business as a well-oiled machine…everything is connected. You can’t image taking components out of a machine and expecting it to work without checking the impact each change has on the rest of the process.  Businesses are not any different. 

• Not every department has the ability to generate the same amount of profit. Don’t punish lean departments for their inability to find fat.  And don’t reward fat departments for their ability to hit easy targets.  Get to know your business and incentivize your teams to achieve or exceed the company’s goal.  Put a bonus plan in place to make it worth their while. You have nothing to lose and everything to gain from their motivation.  Success payouts are a win-win for everyone.

• You don’t need to be in a bad situation to work on efficiencies.  Great companies incorporate efficiency programs into their business every year, good and bad.  Continuous improvement is a cultural mindset and your best employees will seek out opportunities to reduce waste and spend effectively as part of their natural routine. 

• As an employee, the better you are at smart spending, the more funding and capital approvals you will get because you will be seen as a good investment.

Lead the change, develop a smart culture, integrate the big picture and reward success.

Good luck!

Written by Lisa Woods, President ManagingAmericans.com

Lisa is a successful entrepreneur, world-class marketing strategist, and dynamic business leader with more than 20 years experience leading, managing and driving growth. Throughout her career, Lisa has been influential in integration techniques, organizational and cultural overhauls, financial turnarounds and developing employees into exceptional leaders, results driven managers and passionate team contributors.

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