Avoid These Cost-Cutting Mistakes
Cost-cutting, as implied by its very name, is painful. Aside from potential operational disruptions caused by slashing budgets, the initial recognition of the need for cuts is never an easy one to come to.
This is especially true because of the human element: staffing accounts for a majority of expenses at many organizations, so employee-related costs are prime targets for cuts. A survey conducted by McKinsey found that more than half of all cost-cutting programs undertaken by organizations in the wake of the 2008 recession involved labor reductions.
Layoffs are surely one of the most severe forms of cost-cutting, but they’re not the only one that adversely affects employees. Though trimming benefit packages, office expenses, travel costs, and non-payroll perks are less dramatic than letting go of staff, these measures can all hurt employee morale and productivity.
Additionally, these forms of cost-cutting often fail to achieve their intended effect on a business’s finances. One study found that only 10 percent of cost reduction programs show sustained results three years later.
Know What Costs to Target
Top-down decrees to reduce costs by a target amount emphasize the “how much?” at the expense of the “how?” and “why?” Rather than conduct a bottom-up analysis of what’s driving costs, a company cuts across the board by a predetermined percentage. This indiscriminate approach not only cuts too deep in some areas but also misses opportunities in others.
Companies have to be able to recognize the low-hanging fruit that offers the greatest potential for savings. External benchmarks – for instance, of travel costs by destination – are one method for determining whether your company’s expenses are in line with peer organizations. Internal benchmarks matter too. Before embarking on any cost-cutting program, it’s essential to look for data that shows how certain expenses have changed from year-to-year, and how they correspond to revenue-generating activities.
Involve Employees
It’s not always easy to involve employees in meaningful conversations about spending. Changes to expense policies, staffing, compensation, and benefit plans can easily confuse, demoralize, and upset employees. Even cost seemingly minor control measures can have a disproportionate impact on morale – see the example of Silicon Valley startups attempting to trim their lavish perks policy.
However, there are ways to minimize acrimony resulting from cost cuts. It’s useful to solicit feedback about spending decisions that affect employee’s day-to-day sense of well-being. This doesn’t mean making your budgeting process subject to a popular vote: cost control measures will inevitably create a certain amount of resistance. But by identifying employees’ priorities, and being transparent about the trade-offs involved in reducing costs, it’s possible to cut expenses while preserving a healthy organizational culture.
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