Cutting costs is never fun or easy, but for companies facing tough times, it’s often the only realistic solution. If your company is faced with pressure, what are you doing about it? Are executives taking quick action?
Unfortunately, when companies realize they’re starting to hit a wall, they either wait too long to take action or take the wrong action. We’ve talked with many executives who, in retrospect, say, “I wish we didn’t wait for so long to cut costs.” Many simply don’t have confidence in their own decision-making and don’t recognize the possibilities until it’s too late.
When companies finally get around to cutting costs, everyone is quick to point out where cuts should be made. That is, in other departments than their own. The Chief Operating Officer says, “You could make cuts in the back office,” and the Chief Accounting Officer suggests, “You could make cuts in the field,” which leaves the company stuck in a push-pull without real answers.
Today, companies usually follow one of three paths when it comes to cost cutting:
Some companies start looking in the market for acquisition opportunities so they can say, “We bought another company, so now we can become leaner and achieve synergies through this acquisition.” This doesn’t always work as planned.
Consider the Sears and Kmart merger. The two companies merged to form a larger organization and create synergies, but they didn’t do much cost cutting or rationalization. While Sears once owned the crown-jeweled Craftsman and Kenmore brands, you can now buy Craftsman and Kenmore products anywhere. Sears simply wasn’t proactive enough.
The Sprint and Nextel merger is another example of an acquisition gone wrong. They thought combing their customer bases and service offerings would help them grow. However, there was a huge culture clash, they had different approaches to leadership and business operations, and many executives departed soon thereafter.
Putting two mediocre companies together won’t make them great. If you merge two companies but don’t take advantage of the synergies and don’t rationalize your costs, organizational structure, etc., the merger become futile.
This approach to cost cutting happens more often than not. Executives know cuts must be made, but they wait it out or do it halfway. When going through the budgeting process, they might say, “We are cutting travel expense for the rest of the year,” or “I was going to hire five people this year, but now I won’t.” The problem is, these costs creep back up. Those five people who weren’t hired last year will be needed this year, so they end up hiring them anyway.
Successful companies take the bull by the horns and proactively cut costs. Consider the following examples:
In 2008, Ford Motor Company knew a downturn was coming, so they aggressively cut costs, reduced product lines, and received a line of credit. When things got bad in 2008-2009, they were the only U.S.-based auto manufacturer that didn’t use federal money or merge with another company.
Best Buy was under pressure for many years once Amazon and online resellers increased in popularity. Best Buy has done a great job of cutting costs by downsizing the size of stores. Ten years ago, Best Buy was a huge store, but now they’re smaller and more focused on the community to whom they sell. They’ve been in cost cutting mode for a while, and they’re still around. Their online sales are also very good.
Engage the right people in the organization to create more buy-in and decrease the hit to the culture. Utilize a combined top-down/bottom-up approach:
Top-down: Understand your differentiators in the market and develop a clear strategy for the future. Prioritize what is important to the organization and let the remainder be “up for grabs” for cost cutting.
Bottom-up: Understand what is happening in the field (aka a grassroots understanding). Talk to field service technicians, people in the stores, people in the warehouse and distribution centers, etc. to learn what they need, what works, and what doesn’t work.
People in the field are not likely to buy into or comply with a purely top-down approach. Including a bottom-up approach, they will likely own the changes. People in the field know when a company is struggling, and they might have ideas that are more dramatic and effective than the ones developed by corporate. Read more on how to cut costs here.
There’s no one-size-fits-all approach to cutting costs. The most crucial steps are to be proactive and do better with what you have. Most importantly, protect your crown jewels that make you different and better than the competition.
