Peter Drucker, the father of business consulting, once famously said: “Because the purpose of business is to create a customer, the business enterprise has two – and only two – basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs.”
If we are to take Drucker’s statement as axiomatic, it follows that marketing and innovation are the only indispensable business functions and that everything else is expendable. But just because something is expendable doesn’t mean it should be eliminated. The word “cost” shouldn’t carry such a weighty negative connotation. In business, as in life, there are good costs and bad costs.
When seeking to improve an organisation’s bottom line, it is important to remember that cost cutting does not always correlate with increased profits.
Oftentimes, when an organisation wants to improve their profitability, they will look to make cuts. An easy place to start is with administrative costs, staffing and benefits. While undoubtedly a great way to save money in the short term, this can cause employees to become frustrated and disillusioned, leading to lower morale and decreased productivity. Moreover, customers may also become disgruntled if they notice that products or services have dropped in quality.
Customer dissatisfaction will always cost money in the long-term. If the organisation has not taken the time to assess how cuts will affect productivity and growth, they may find that their cost reductions inadvertently turn into profit reductions.
Why have a cost reduction strategy?
Organisations must take the time to determine which expenses help the company grow, and which expenses can be cut without harming any essential part of the business.
An effective cost reduction strategy entails more than the name implies. It’s not just a cost-cutting exercise. It’s a comprehensive look at the entire business that aims to reduce costs only in the areas that do not contribute to the company’s growth strategy. The goal is to both improve the company’s bottom line and redirect funds to innovation and transformation, increasing not only profitability but employee and customer satisfaction as well.
The first items on the chopping block should be any expenses that don’t align with the company’s strategic goals for growth. If the expense isn’t directly contributing to the achievement of the company’s long-term goals, it can be better used elsewhere.
Expenses that do contribute to the long-term success of the organisation are not immune to cuts, but they should be much more carefully considered.
Investing in better products and services based on consumer feedback is almost always worthwhile. Moreover, expenses that help a company differentiate itself are absolutely crucial to the organisation’s long-term success. Cuts in other areas should be channelled towards these innovative activities and they should only be de-funded under the direst circumstances.
When an organisation has determined which costs are essential and which can be eliminated, it can minimise expenditures in wasteful areas while maximising attention and investment in productive ones.
Where else can money be saved?
A good cost reduction strategy is not simply concerned with cutting expenditures. There are many ways to improve the bottom line that do not require actual monetary cuts.
Improving the organisation’s processes is an excellent way to save money. For example, if different employees in a company all write similar documents from scratch, the organisation could create templates and allow the employees to share information with each other to streamline the process. Anytime a good process replaces a non-existent or sub-optimal process, the organisation saves money.
Once processes that function smoothly are well-established, they can often be automated. Automating menial tasks frees employees up for more interesting and rewarding tasks involving innovation and more interpersonal work. Although automation is not a cure-all, it can certainly save both time and money if the right processes are in place.
Finally, a comprehensive look at company spending should reveal many other areas where money can be saved. For example, organisations can take advantage of reward or loyalty programs for travel expenses, renegotiate pricing with trusted vendors, and consolidate complementary areas of the business.
Acting is better than reacting
Many highly successful and profitable organisations don’t place enough focus on costs and efficiencies. When market conditions turn against them and the business begins to unravel, they are often too slow to react.
The best way to approach cost-reduction is to instil a continuous cost-management mindset when the organisation is growing successfully. If everyone is aware of the strategy and constantly taking opportunities to contribute to it during the good times, the organisation will be much more resilient when difficult times arrive. Times of crisis do not engender measured decision making. As the saying goes: It’s best to fix the roof when the sun is shining.