“This company is getting too expensive!”
If you are related to the business management career, probably you’ve heard that saying from your superiors or colleagues once or twice.
To increase profitability is not a surprise to anyone working with results oriented teams. Yet… very often we find businesses struggling to reduce their costs in a proper way.
In this post, I will explain how the old mindset to reduce cost (cost-cutting) is not sustainable and might actually hurt your business. And also, what is the right way of reducing costs (cost-innovation) in a continuous, viable way and the aspects to make it happen correctly.
The problem with cost-cutting mindset
The main reason that business start a cost-cutting project is because they want to increase profit for their shareholders or to get rid of debt.
Usually the cost-cutting mindset focuses on reducing overhead expenses, such as:
- Wages and Payrolls.
- Administrative operations.
- Marketing and sales.
The result is an increase on the Net Operating Income. But for how long?
What happens after you reduce sales commission? Will the team keep themselves motivated to sell the company’s products just like before?
What happens after reducing maintenance costs? Is any machinery line being compromised by the lack of supply of its parts? Will your production capacity decrease because of downtime?
What about purchasing? Did you check with your customers if they would be OK if you change the products package for a cheaper one? Did you run the appropriate tests?
What about your business strategy or long-term plan? Are you cutting costs now because you need for an emergency? Or is it part of your culture to make it happen as an ongoing strategy?
As you can see… Any decision you make on which variable you want to reduce, is far more complex than just pick-and-choose. Every cost-reduction project will affect how the company works, and this is exactly why cutting costs for the sake of it might hurt your business.
The Cost-innovation Process
On the other hand, cost-innovation focuses on value.
Instead of looking at the numbers only, cost-innovation brings value to customers and establishes a healthy culture, focused on costs optimization.
There are 6 aspects to develop an effective cost-innovation process at your business:
1 — Expertise. Do not be surprised, the process starts at you hiring department. You need to develop a well trained and experienced team in order to achieve cost-innovation, which will demand an effective problem-solving and creativity skills at your business’ industry.
2 — Clear goal. Do you want to reduce costs? Great! How much??? And please do not answer “as much as possible”. This is by far one of the biggest mistakes that I’ve seen businesses make.
You must work as clear as possible on setting your goals so you (and your team) do not lose track of your own expectations for the project.
3 — Align cost optimization with your business strategy or long-term vision. The main purpose of this criteria is to make more with less… And it does not happen overtime. If you are serious about running your business optimized and lean, you must embrace the responsibility of sticking to it in the long run.
4–Profitability cannot be the ONLY metric. Of course your business must profit, but there are other principles to consider after cutting costs.
When performing an across-the-board cost reduction remember to reinvest the profit on what really matters: Products & team development to add more value to your customers.
5–Learning & cooperation environment. I believe this is a key aspect for cost-innovation policy. If you take into consideration that we have to be creative to solve problems effectively, you must design an appropriate environment for your team. Shared learning, good leadership, prototyping and safety for contribution should be cultivated as a culture.
6 — Continuous Improvement & System Thinking. You cannot be negligent with this one. Look at the business model and its parts. Try to understand how the aspects and events relate to each other. This is extremely important in order to avoid the “silo effect” and reduce costs without a proper analysis of its consequences and counter-measures.
Ultimately the real objective is not about cutting costs at all, but rather a redirection of investments. — Tom Agan
As many other innovation processes, to reduce costs through innovation means also to maintain (or increase) the product quality and value to the customer. To make that happen you must not only look at the numbers financially but also to embed the appropriate culture and business model to sustain it.
Cost-innovation after all is a long-term game involving continuous improvement and cooperation. If done correctly, profitability increase will be a cultural consequence.
So look for the numbers… And the whole picture.
I hope this post was helpful. Do you have any tips on how to implement a cost-innovation strategy in your business? Let me know in the comments and please share this post with a friend if you liked it!
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