Culture is the key to Sustainable Cost Reduction

What happened with those cost cutting measures you implemented three years ago when circumstances necessitated an urgent reduction in costs?

Business owner: (Silence).

Business owner: (Shuffles and scratches his head trying to think what measures were implemented although he well remembers the fall in profits that lead to them being implemented).

The reality is they’re probably long since dead.

Cost cutting measures implemented in response to a ‘state of emergency’ rarely last beyond the recovery period.

This is because:

    1. Once profits are flowing again management redirects their energy to focus on another area
    2. They were determined with consideration to short-term needs rather than the business’s strategy and long term goals
    3. The cost cutting measures were projected to staff as painful restrictions rather than as steps of continuous improvement
    4. They stopped producing savings.

But don’t worry. They will come back.

Business owner: “They will what?”

Come back.

Business owner: “What?”

Those cost cutting measures that you implemented turned out to be band aids.

Business owner: (frustrated) “Look here, what do you think you’re talking about? I’m paying you to give me advice and you’re just talking about things coming back and band aids. That’s not what I pay money for!”

What many of us fail to see is that we haven’t changed the culture that resulted in the need for the cost cutting measures before. Unless we do that, at some time or another we are going to have another crisis where you will either resurrect the original cost savings or implement new ones. So they will come back, with no guarantee that you won’t be doing the same thing again a few more years down the track, because you didn’t address the fundamental problem.

With today’s pace of business, you can neither afford the time or resource to go on implementing programs you will have to repeat indefinitely.

So whether you’re considering cost cutting in response to your business situation or as a proactive step towards protecting your businesses financial future, if you want sustainable results you need to treat it with the respect it deserves. Cost cutting should be undertaken with a ‘future thinking’ mindset.

Four Tips for Sustainable Cost Reduction:

1: Cultivate the Culture
If the culture in your business doesn’t support cost reduction, the cost reduction measures you implement are destined to be short lived. Urgency to cut costs may obtain you support from your team for a time but that will not last.

Take the following example:
Business Owner: “From now all face-to-face customer visits will be replaced with virtual meetings to cut costs”.

As a result of this decision, employees start holding virtual meetings with customers instead of making face-to-face visits. However there are many frustrations and they sense the level of interaction with customers is falling. It is harder to pick up all the visual and non-visual cues given by other meeting participants in a virtual meeting and this is limiting employees ability to respond appropriately.

What if the message was communicated differently?
Business Owner: “We have been looking at ways we can progress towards achieving the vision for this business, particularly in terms of improving our interactions with customers whilst also improving profits. The first initiative to be implemented will be a move from face-to-face meetings to virtual meetings. This may be painful short term while we learn how to get the most from the new format. However there are many reasons to do this which will offset the pain long term and help us to achieve the vision. As we won’t be travelling all the time from one meeting to another, we will have the capacity to be more available and responsive to urgent requests from clients. We will also be able to invest in more time per client. And, because our representatives won’t be needing to start in the early hours to beat the peak city traffic, they will be able to work more family friendly hours.”

In this case the employees also start holding virtual meetings with customers instead of making face-to-face visits. They experience they same frustrations initially but manage that as a temporary issue and manage it with further training and sharing feedback.

What’s so different?
The problem faced in both scenarios was the same – the struggle with obtaining the same results in a virtual meeting as they did in a face-to-face meeting where there was more scope to pick up visual signals from other participants. In the first example the employees were stuck with the impersonal reason of ‘cost cutting’ and had no reason to believe the future might better, so there was no incentive to try to work with the situation to improve it. In the second example the employees were part of the bigger picture. They understood the reason for the decisions and were able to offset the short term pain with the future gains. They also found it easier to discuss the change with clients.

So before you do anything else, check in whether your existing business culture is going to support your upcoming implementation of long term cost reduction.

Need some tips on changing your business culture? Check out our article Nine Principles for Improving Business Culture and Leadership from “Turn the Ship Around!”.

2: Plan with Intelligence
Decisions on which costs to cut should be strategic. You need to be intelligent as to where cuts can be made without causing negative impacts in other areas of the business. Accept that to be in a profitable business you will have to have some costs. If you cut back too far you may end up with no business.

Take the time to understand where money is currently being spent and where it is delivering value to your business. If money spent is not getting you a return then that’s an obvious cost to cut. However you do need to be careful to consider whether there is any flow-on return associated with a cost such as improved productivity or capacity.

Don’t forget to check that any cost reduction measures you may already have in place are delivering savings. If they are not, it may be time to refocus.

Compile your findings into a solid plan for which new cost reduction measures you are going to implement and when. Any measures you choose to implement should be sustainable and continue to deliver a return over time. Also be careful to keep things simple for your team to follow.

3: Commit Qualified Resources
To quote Deloitte, cost reduction “isn’t a part time job and shouldn’t be treated as such.”

If you want your cost reduction implementation to deliver a significant result then commit to using appropriately skilled staff to manage the implementation. Make sure they have the time to manage it as part of their day job – if they already have a full workload then look at where this can be reassigned. If they don’t have the time, it won’t get done.

4: Monitor regularly
Set a schedule of regular meetings to monitor the implementation and report on cost savings obtained. You need visibility on what measures are working and you may need to refine them over time.

Interested in further reading? Check out these articles:

All the best!

Our team can help with analysing what cost saving measures would be appropriate for your business. If you are interested in discussing please call us on 03 5339 3200 or contact us here.

Thanks for reading.

By Genna Kidd

The information contained on this website has been provided as general advice only.  The contents have been prepared without taking account of your personal objectives, financial situation or needs.  You should, before you make any decision regarding any information, strategies or products mentioned on this website, consult your own financial advisor to consider whether that is appropriate having regard to your own objectives, financial situation and needs.

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