Some Like it Smart: Two Different Strategies for Expense Reduction
By Adrian Travis
The recent COVID-19 outbreak has resulted in some very unprecedented actions on the part of world governments and businesses. The only certainty seems to be uncertainty itself, and it’s not yet known how long the situation will last or how damaging its impact will be. Simultaneous interruptions to both supply and demand for goods and services will test the resilience of companies in varying ways. Downturns tend to elucidate the differences between businesses that are strong and prepared, and those that are weak and reactionary.
One unassailable fact is that ALL businesses will need to shore up their financial performance and balance sheets. Most cost-cutting initiatives are indiscriminate and value-destroying in the long run, while a more targeted approach is always a good course of action for the short, medium and long term.
Value Destroying Ways to Impact the Expense Line
During difficult times, blanket edicts like ‘all cost centers must reduce spending by 15%’ often look like acceptable business decisions but are bad long-term ideas. Companies fall into several traps:
1. People are expensive and visible – staff reductions tend to be indiscriminate and expensive if they’re done in a haphazard way. The morale of those that remain is typically problematically impaired. In the long run, it may cost even more to re-hire when situations improve. A great question to ask is: ‘knowing what I know about a given employee – would I rehire them today.” If the answer is yes, then except in a dire situation, making an unfortunate employment decision will typically be a value-destroyer.
2.Abandon long-term projects – Focus on ‘urgent problems and forget the rest’ while sacrificing innovative programs which might sound advantageous in the heat of the moment. If it’s a project that is critical to long-term success, avoid the reactionary tendency to abandon it. Remember, you only regret the things you don’t do.
3.Cut corners – By reducing service and quality attributes, companies inadvertently cause harm to their competitive position. Sometimes companies switch to less-expensive business partners or suppliers only to incur expensive transitions back and forth. Most harmful of all is engaging in an outright refusal to pay invoices or using thinly veiled subterfuge to avoid payment for well-delivered products or services. This final instance has the effect of compromising your business network permanently.
Smart Strategies for Expense Reduction
Hazard Expenses – These are typically ‘costs of doing business’ hazards like excess, obsolescence, expiry, damages, overages. Making the distinction between ‘good’ and ‘bad’ costs is essential for prioritizing improvement initiatives.
Hidden Losses – Trindent’s consulting practice is almost exclusively focused on ensuring that unnecessary quality isn’t given away in a business process. As well, consider if you are getting full value for the inputs that you pay for. A refinery, for example, typically receives 0.7% less crudes and feedstocks than is paid. The same refinery may also be paying for expensive sediment and water at the full price of crude oil.
Productivity – Impacting human performance by eliminating unproductive activities, rework, waiting, double-handling, planning or other forms of waste is always a viable strategy to compete better. Even in the best of times, Trindent has found that average human productivity in a bank or insurance company processing center is only 43%. The significant opportunity associated with the remaining 57% of ‘lost time’ can be tackled in order to shore up a business’ expense performance.
Cash Flow – Working capital tends to expand significantly during downturns, which forces sometimes counterintuitive decisions to be made on a variety of fronts. Structured working capital initiatives should focus on optimizing receivables, inventories, and payables. There are a number of innovative strategies and tactics that can give a company millions of dollars in free-flowing cash from operations.
While the impact of the business interruption we face is not known, it’s always a prudent idea to shore up a company’s financial position. Episodic cost-cutting initiatives typically undermine a company’s long-term success prospects. However, the best-performing companies are not sporadic cost cutters, but are seeking to drive every-day improvement in the right areas, in the smartest possible ways.