Most businesses face a time when they have to cut costs to restore or increase profitability. This is particularly true in the fast-changing marketplace of today. To be successful over the long haul, businesses must be adept at quickly making the changes necessary to respond to new challenges. Most of the time, the changes that are required include cutting expenses overall or making cuts in particular areas.
Expense cuts come in three forms:
- Operating expense reductions that can be made quickly, and can also be reversed reasonably quickly if needed. An example of these are expenses such as training and marketing.
- Fixed cost expenses. These involve reducing facilities or shutting down other long term assets. While significant savings can result from this type of action, shutting down facilities has significant long term implications. Over the longer term, this type of action will reduce capacity and can make it difficult to retain or increase market share.
- People-related expenses. Cutting staff is painful but can also be quite effective if done properly. Not only can it be an opportunity to lower costs, but it can also allow the company to use the staff reductions as a means to let go of poor-performing employees. Once the organization has been pruned properly, the remaining employees are likely to be more talented and more effective.
When looking to control expenses, it is important to maintain an effective strategy for retaining existing business and acquiring new business. You should resist the temptation to cut sales and marketing costs aggressively without carefully considering the impact on current and future sales.
Similarly, cutting fixed costs should be approached carefully because it is difficult to reverse these actions. Unless the company plans to permanently reduce capacity in a market niche or has decided to abandon a niche, closing facilities can handicap the company’s ability to recover market share when business gets better.
One of the first places many organizations often look to for quick expense savings is sales and marketing. While expense cuts in these areas are easy to make, the long term impact of these cuts can be devastating.
The reality is that returning any business to profitability is more related to increasing revenue than it is to expense reductions. Ultimately the only way to turn a business around is to increase top line revenue. It is essential to keep this in mind while cutting costs. In farming terms, make sure you are not eating your seed corn.
This means that cuts in sales and marketing need to be done carefully, with a surgical knife, not a machete. Ineffective marketing campaigns should be cut as soon as possible. Poor performing sales people should also be jettisoned quickly and their accounts or territories given to sales people who are effective and hard-working.
Beware of cutting good sales people. They always create more value than their cost. On the other hand, ineffective sales people do not get results. They also are expensive and may also hurt your image in the market place. Look carefully at your sales staff, especially the weak performers. If they are not effective, let them go quickly.
Another cost cutting strategy that can harm a business is to revise sales incentive compensation. It is generally not wise to reduce incentive compensation during difficult times because the usual result is that the best sales people in the company will leave. Getting rid of poor performers and revising sales compensation to pay the remaining people more to cover larger territories or more accounts is generally a good plan. The result of this is giving all or part of the savings from releasing poor performers to the remaining sales staff.
Some cuts in marketing and promotion expenses are often essential as you tighten up to survive with a lower level of sales. However, try to make sure that cuts in this area do not impact your long term marketing strategy. Revisit your strengths and weaknesses as you adjust your marketing budget to ensure that you are not cutting things that will impact your ability to do business effectively in the long term.
Even though it may not seem so at first, the most profound impact from cost reductions will usually result from reducing staff. If done properly, trimming back poor performers prunes the dead wood out of the organization. When things turn around, the organization is often able to replace the people that left the organization with people that have better skills and who are more motivated.
As you look to reduce the number of people in the organization, it is important to look at each person’s role in the organization. Consider the value each person is creating. Do they create value in excess of their cost?
Based on this analysis, develop an action plan with a focus on keeping the people needed to meet the long term needs of the organization. Here is a list of the activities required to reduce people costs effectively.
- The first step in this process is to cut people in all areas of the company who are poor performers. This includes cutting people in parts of the company that are doing well. Clearing out deadwood throughout the organization opens up positions that can potentially be filled by good performers reassigned from other areas whose prior position is no longer needed due to the poor prospects for their part of the company.
- Look at segments of the company that have a bad future and consider totally shutting them down or reducing staff significantly. Move good performers from these segments to more successful areas of the company.
- Review the management structure of the organization. People identified as managers should actually be managing people, product lines, or customers. Managers of people should have at least 4 direct reports. If they do not, reduce the number of managers.
- If these steps are not enough, then the difficult part is upon you. At this point you have to be willing to let some good and loyal performers go. The key to this process is to continue to focus on performance. While seniority is important, resist the urge to keep mediocre people with longevity while letting go other people with more talent and motivation.
The goal is to get through this process to meet the cost reduction goal while keeping the best people that you can. The value of all organizations is in its people. But what this really means is that the value of an organization is in its high performing employees. If you can strategically reduce your costs yet hang on to your best people, then you are poised for success when your revenues begin to grow again.