The current recession has driven down the value of many goods and services (gas, real estate, my 401k) and triggered seemingly endless rounds of layoffs. You know it's bad when the formerly un-assailable Tiger Woods loses a lucrative endorsement deal (with General Motors; enough said). But the climate of uncertainty has managed to drive up at least one thing across nearly all industries: the number of companies either developing or implementing cost-cutting plans.
This underscores the fact that when the going gets tough, the tough start cutting costs. Expense reduction is a time honored technique for pushing profits up during times of declining revenue, and it can produce positive results - at least in the short term. However, all cost-cutting plans are not created equal and all cost-cutting ideas are not necessarily good, no matter how much they appear to save in the short-term.
To paraphrase John Kennedy: Ask not what costs you can cut; ask what you can do to innovate and simplify while reducing costs at the same time. As challenging as the current recession is at the moment, it will recede at some point. Your company needs to remain in fighting shape with a viable strategy and competitive market position to take advantage of the inevitable economic turnaround.
Cost-cutting may be necessary to survive in the short-term. But there are ways to go about this that do not damage your long-term competitive position.
BRIDGES TO NOWHERE
You must, when cutting costs, think beyond the typical "slash and burn" mentality or the simplistic "across the board" approach that takes an equal proportion from every cost center or department. Rather, examine ways to restructure your costs with an eye toward becoming more flexible and easier to do business with for your customers.
For example, actions that reduce service cost but also decrease service quality are the business equivalent of a "bridge to nowhere." A better approach with more favorable long-term impact would be to rethink and reset service delivery to eliminate customer pain points - those parts of your process that drive customer complaints, drive staffing due to re-work and add incremental service costs along with them. Tackling these problems will not only reduce ongoing costs, but will improve your customers' experience - and that will stand you in good stead when the economy rebounds.
Most experts agree: While cutting expenses is often a tool to help assure short-term survival, it is no substitute for a viable long-term strategy that delivers value to customers and shareholders. Reducing expenses to improve profits may be necessary, but if leaders do not concurrently deal with more far-reaching issues, the improved profits will be on an ever-declining base of revenue and sales. In fact, the landscape is littered with examples of companies that successfully cut costs only to go bankrupt when they were unable to recover lost sales and revenue.
The cautionary tale of companies that have won the cost battle only to lose the strategy war includes a long list from nearly every business sector, including retail, manufacturing and financial services, with more corporate casualties sure to follow. A recent poster child for the "cut costs, increase margins, go bankrupt" approach is Circuit City, which is a particularly painful example as it once stood proudly as one of the largest national companies headquartered in my hometown of Richmond, Virginia.
OPTIMISTIC PRAGMATISM
Keeping an eye on longer-term strategy while developing short-term expense reductions can help your company avoid a similar fate. Let others pursue cost cuts for cost cutting sake; many will win the battle and lose the war, and simply will not survive the current economic crisis.
It is possible to pursue a path that is at once both more optimistic and more pragmatic. It means looking for ways to simplify and innovate rather than continuing to do business as usual, and identifying a new cost structure that aligns with simpler or more innovative processes and services. Question whether activities (or even whole work units) still produce value for the customer. Doing this can be painful, but it takes no more time to undertake this approach than to pursue the typical expense reduction plan, and it has the added benefit of yielding more effective and sustainable results, which is necessary to assure long-term survival.
Keeping profitability and performance improvements squarely in the frame when targeting expense reduction can position you for sustainable results - both now and post-recession.
Linda Bambacus is a senior consultant with The Robert E. Nolan Co., Dallas.
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