It is absolutely the finance team’s fiduciary duty, and indeed obligation, to control spending, especially during challenging times of economic uncertainty and unpredictability. Costs inevitably can be cut, and far better to start early and be deliberate about economising than to be forced into dramatic brute force cuts when survival is threatened.
But just because costs can be cut, should they be? …Not always.
Most cost-cutting exercises start with low hanging fruit – the things that are considered non-essential and should have little impact on day-to-day business and ongoing competitiveness if they were to disappear. Waste is an obvious place to start. Look for the business equivalent of that gym membership you signed up for, but then never quite made it into the gym.
But not all low hanging fruit is equal and something that might look non-essential from a top-down, purely fiscal point of view, can have significant unintended consequences from a long term, economic point of view. In which case your cost-cutting is not only ineffective it is also counterproductive. (And makes people resistant to legitimate cost-cutting exercises.)
Three lenses to consider your cost-cutting through to avoid being penny wise and pound foolish are: your people, your customers, and enabling decentralisation in your organisation
Of course it's a good idea to cut back on the three-ply toilet paper before you default on your home loan repayments (to use another personal finance analogy). But when cutting down on things that impact your people day-to-day, think beyond the functional use of that budget line item. Coffee, especially if you had to have any software developers on your team, is a classic example. It's a no brainer to save by cutting back on the fancy artisanal coffee beans and Italian coffee maker, replacing them with filter or instant coffee. You're still providing on-site free coffee to your people, right?
But dig a bit deeper and perhaps this means your team ends up taking more frequent and longer coffee breaks to walk to the coffee shop down the road to get the coffee they want to drink. Or they are not staying for that extra half hour of work (powered by the decent cup of coffee in their hands) because they're feeling demotivated and disgruntled by the whole coffee drought in the first place.
Does the short term, immediate saving on the coffee (or sandwiches, or fresh fruit) line item make up for the lost productivity and efficiency, and lack of morale in the long term? Probably not.
This is more cost-cutting through omission, but during the pandemic, many companies prioritised internal operations over customer service experience. According to an IBM Institute for Business Value report, business leaders plan to prioritise operational capabilities for the next two years. While none of these priorities, which include enterprise, agility, cost management, and cybersecurity, can be faulted they do come at a cost. Business growth, new product development and new market entry were bumped right down as an organisational priority.
It's a tricky one, as there's no doubt that businesses are stretched trying to fight fires and stay sustainable. But it does beg the question: what is going to drive growth if customer service and experience is moved down the list? It's both a lost opportunity to steal the march on competitors, as well as a risk in the face of competitors who do not neglect customers. And in neither instance has the cost-cutting achieved a positive outcome.
Centralisation versus decentralisation
Tough times often encourage businesses to centralise functions like decision making and spend. On the face of it, this makes sense because tighter control can be maintained. But in reality, studies show that companies who decentralise during a crisis fare better in the long run.
A single-minded drive to centralisation can manifest in cost-cutting exercises that reduce your front-line staff’s visibility and input on financial and other critical matters. These are the people at the coalface or the sharp end of the stick and potentially have the most important and relevant information to impart! The impact of this reduced visibility is a slower flow of accurate, real-time information from the periphery to the centre, and means that top-down decisions are made with outdated information and little awareness or concern for local, nuanced context or opportunity. Not to mention it disempowers and demotivates your people just at the time they need to be most engaged and productive. And importantly, it prevents them from having a good handle on the financial data that falls within their remit, which is entirely counter-productive to effecting cost savings.
Taking a narrow view of the costs associated with the number of users who have access to information that gives them increased visibility and input into essential data, can end up costing you in the long run. It can impact your ability to grab new opportunities, and ironically, far from giving you more control, a centralised outlook can block the very data and insight needed to make good cost-cutting decisions.
So absolutely do use cost-cutting as an important weapon in your post-pandemic arsenal. But do also question your assumptions around what is essential and non-essential. Instead of assuming and making top-down decisions that are little more than arbitrary, tap into your people and customers’ insights to find out what really matters. And then, instead of being penny wise but pound foolish, your cost-cutting efforts can help fuel real business advantage and capabilities.
As published AccountingWeb - August 2021