4 common cost-cutting mistakes to avoid
Is cost-cutting your first thought as you plan your way out of the pandemic? Slashing costs is a common measure to help get a business back on track but there needs to be a more strategic solution to ensure the business has a foundation for success.
Dean Hosking, general manager at Konica Minolta, understands why many companies default to cost-reduction as a response to disrupted revenue streams and inhibited cash flow.
“Businesses may be risk averse in the current climate and may be looking to minimise outgoings to lower risk. The truth is that this is more likely to cause more problems than it solves and it doesn’t position the organisation for a strong comeback unless the business was spending profligately before the pandemic,” he suggests.
“Instead, organisations should take a strategic look at expenditure and see where changes can be made to deliver a stronger return on investment and manage costs for growth.”
Konica Minolta has identified four common mistakes businesses to avoid:
1. Setting unrealistic targets
Indiscriminate cost-cutting may not be realistic or productive in the long term – for example, ‘reduce expenditure by 10 per cent across all lines of spending’. While setting unrealistic targets may look good on paper, failing to achieve them is only likely to disrupt the organisation and, potentially, damage morale.
Tim Greenhill, senior consultant, Impact Management, says “Cutting costs across the whole business might see the organisation reduce its headcount and its investment in marketing, for example; two of the most essential tools to get the company back up to full speed.
“Rather than cutting costs indiscriminately across all areas of expenditure, organisations may be able to make significant cuts in some areas without affecting the company’s performance or ability to compete. That’s where the savings should be focused.”
2. Failing to sustain behavioural changes
Cut costs where they can’t be sustained and it is inevitable spending will creep up again, eroding margins and growth. Going on a ‘cash diet’ may seem realistic when times are tough but, as the business looks to build, it’s unlikely to be able to sustain these cuts.
Greenhill says “Looking at cost optimisations that can be sustained over the long term and that add real value to the business is much more likely to yield real success. Again, this means decision-makers need to avoid knee-jerk, reactionary cost-cutting decisions and look deeply into the business to see where it really makes sense to tighten up spending not just in the next few months but over the next few years.”
3. Slowing down the organisation
In some cases, it may be necessary to put expansion on hold or consolidate rather than develop new services or products. But there’s a caveat. If businesses don’t invest appropriately growth can slow down dramatically.
“Winning companies tend to focus on fewer products and services,” points out Greenhill. “They look to amplify the best-performing products and services by investing in the ability to scale these areas. This might mean investing in research and development, adding more staff members, or purchasing new equipment. Companies that overlook these opportunities will miss an important opportunity to get ahead.”
4. Choking off innovation
“It may sound counterintuitive yet now is the time for bold bets, as long as they’re underpinned by strategic planning and sound data. Leveraging every opportunity for growth is going to require investment,” he says.
“Taking a measured approach to cost cutting can help organisations identify the right areas to make savings so they can redistribute funds to the areas that will pay off.”
Growth requires investment. Being too conservative and failing to invest in growth areas can choke off the innovation that’s required to take businesses forward.
“Organisations shouldn’t be looking to just cut costs for its own sake; instead, they should be looking at how to allocate money where it will deliver the strongest return on investment. Those that can do that well will be best-placed for growth in the post-pandemic environment.”