Many factors arise over time that may shake up an organization and require difficult decision-making. Even as the global economy emerges from the depths of the pandemic, we are witnessing new threats to businesses due to rising inflation, Russia’s attack on Ukraine and the volatility of oil prices.
When faced with challenges such as these, organizations tend to seek quick solutions to offset the impact on their business and balance sheets. That’s why cost reductions are often prioritized as seemingly easy wins when a business is faced with disruption. Equally, in a distressing situation which requires immediate action to stem cash outflows and rebalance the books, management will look to cut costs without delay, even to the detriment of the business’ long-term viability.
However, there are ways to implement cost reductions which mitigate this risk. To support the difficult decisions executives must take at these crucial times, these are the best practices and considerations for cost-cutting, while ensuring long-term success.
Have a focused approach to cost-cutting and avoid a ‘one size fits all’ approach
- Conduct a thorough analysis of the business structure and make targeted decisions when cutting costs rather than implementing blanket reductions across the business. It is recommended to establish a cross-functional project team to ensure all implications of cost-cutting on employees, customers, products, footprint and technology are taken into consideration and clearly understood across all categories.
- In fact, you may even have to increase costs in one area of the business, while cutting costs in another – to avoid decisions that negatively impact the overall enterprise value.
- It is essential to cut costs thoroughly and efficiently when a business area is selected. Organizations must be clear that cost-cutting is a priority to generate profitable growth.
- Transformative changes are often painful, but necessary to avoid continuous new rounds of cost-cutting, which leave a lasting negative impact on organizations.
Protect profitable revenue streams as far as you can
- Focus your efforts on costs that have the least impact on revenue streams that are generating positive throughput (which is essentially the margin after cost of materials).
- In the event you do have to cut costs that impact your revenue directly, ensure you are getting rid of fixed costs attached to the revenue stream to the extent possible. The typical mistake is to cut low-margin products where some of the fixed costs are allocated to them – leaving other products to carry the full burden of those fixed costs.
Set a clear direction for the organization
- Transparency is key. When announcing changes to the organization, ensure employees are aware of the intention behind the decision to cut costs – having a clear direction for the business will make it easier to gain employees’ buy-in.
- Outline the company’s growth strategy, highlight the positive impact decisions will have on its long-term plans and take into account the benefits for individual employees.
- Communicate the quick wins to build trust and reassurance among employees and management. This also strengthens your company narrative, while creating excitement and confidence around the organization’s future plans. Good examples of quick-wins can be derived from reducing discretionary spending.
Look after talent even during times of distress
- In a restructuring scenario, there is often a drain on talent – losing the very people who will ensure the future of the company - so it’s important to try to retain your key talent as fundamental to the success of the business turnaround.
- This isn’t just about investing financially; taking time and effort to communicate and manage your talent through the process will also go a long way to helping engage and keep them.
Understand the impact on cash
- In this region, employees’ accrued end of service benefits might mean that the cash impact of any layoffs is negative in the short-term.
- Particularly, if the company is short on liquidity, understanding the potential cash constraints with cash forecasts is critical before any decisions are made.