Cost Cutting – What does it achieve?

Whenever there is a crisis, the first thing you will hear business enterprises do is “Cost Cutting”. This recent economic downturn was no exception. A recent McKinsey Global Survey reveals in its summary that companies were able to cut costs effectively through the crisis, but are less confident of their ability to contain or continue to cut them. Just to linger on a bit more on the research, it also shows that the multiple motivations for cost cutting have the same uniform (almost) cost factors for labor (front line and Overhead) and non-labor (Other overheads and Assets). It should not come as a surprise therefore that the biggest motivating factor for cost reduction is “reduction of variable costs in line with lower demand / volume for the products and / or services.

So, what is wrong with this picture? In one simple statement the answer is: “you are focusing on reducing your capacity (volume) instead of trying to increase the value of your products and / or services”.

No doubt, there needs to be a balance between Volume and Value and all cost cutting is not bad. But to react with cost cutting only in a crisis IS and Volume being affected rather than Value is the real crisis. It is like cutting off the roots of a tree so that the tree will draw limited resources from the soil. But overtime, the tree will may continue to produce less fruits and its life itself may be shortened. If we were to examine successful businesses 10 – 5 years ago and compare them now, you will find this trend reflected in their decline.

Cost Cutting is just a symptom of an organization’s problem. The real cause is poor Forecasting, Planning and Budgeting integrated with active Business Performance Monitoring. Clearly, business enterprises need to use cost control as an effective measure of Business Performance Monitoring affecting key areas that do not respond to the Value Proposition as opposed to just the Volume disposition; because taking care of  Value will automatically take care of Volume, be it a good or a bad economy.

This reminds me of a neighbor in my native town of Kerala. Every Thursday, the man of the house would go to the wholesale market to buy vegetables for the week. He would make it a point to go as late in the evening as possible when the vendors are desperate to push their stocks and retire to their homes for the day. In the process, he believed he brought home bargain. May be he did, but he also brought home the left overs of other smart buyers. So everyday, when his wife wanted to cook, he accomplished the pre-operation of segregating the stale components of the vegetables. Well, that is how they lived day after day, week after week, not knowing what nourishment is and I wonder if they really saved any costs?

The very fact that an enterprise embarks on cost cutting is tantamount to admitting (in most cases) that it has been irresponsible (unplanned) in its expenditure. So one needs to examine why it is allowed to repeat its mistakes by its shareholders. Why is it that the cause (Forecasting, Planing, Budgeting & Monitoring) is not addressed as opposed to the Symptom (Costs) every single time? Should exceptions be made to rule the business enterprise?

I can understand cost cutting as a justifiable means in the manufacturing sector with the impact of economy. But I will certainly never be able to understand cost cutting in the services sector. Simple logic dictates that a good service anticipates the business in its requirements for the future and supports the same. Instead of doing that, if the CXO’s in the service companies are busy massaging the numbers being reported, this needs to be questioned, no matter who it is!!!

About Subbu Iyer

Subbu Iyer is an Innovation & Transformation Leader as with 28 years of serving customers globally. He is currently the Chief Designer & Transformer at Energizing Innovation, an enterprise that is being founded to facilitate continuous growth in enterprises and as a consequence create societal wealth. The Radical Shift that this enterprise intends to employ is focusing on the Potential rather than the Performance of a business. He has been a serial entrepreneur and an intrapreneur in his past life, having founded Nihilent Technologies and Nandaki Systems besides being associated in senior leadership roles with firms such as Coopers & Lybrand, Cambridge Technology Partners, Tata Consultancy Services, Wipro Technologies and Steria.
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