A Guide to Efficient, Viable and Sustainable Cost Cutting Strategy
Blog Categories:
Published:
December 3, 2023
Reading Time:
6 minutes
Reducing costs and expenses to maximize profit is the ultimate goal that businesses strive towards. A good cost cutting strategy ensures firms use their resources strategically and efficiently.
For many firms, cost cutting is a strategy to stimulate growth and gain competitive advantage. On the other hand, many companies resort to cost cutting when the economic landscape becomes increasingly uncertain and unpredictable. According to a survey by PwC, 42 percent of senior executives viewed cost cutting as a priority in 2023, a year filled with several uncertainties.
In this blog post, let’s find out why cost cutting is important, tips for a sustainable cost cutting strategy, and considerations for the implementation of cost cutting strategy.
For many firms, cost cutting is a strategy to stimulate growth and gain competitive advantage. On the other hand, many companies resort to cost cutting when the economic landscape becomes increasingly uncertain and unpredictable. According to a survey by PwC, 42 percent of senior executives viewed cost cutting as a priority in 2023, a year filled with several uncertainties.
In this blog post, let’s find out why cost cutting is important, tips for a sustainable cost cutting strategy, and considerations for the implementation of cost cutting strategy.
Why Firms Need to Cut Costs
Cost cutting is understood as measures/plan/strategy adopted by a firm to decrease its expenses and increase profitability.
It is often implemented to keep firms afloat when there are economic downturns or financial distress. It can also be initiated to help firms stimulate growth and improve profitability.
According to Investopedia, there are many measures firms take to cut costs. They range from slashing jobs, reducing employee incomes, shutting down facilities, to downsizing a business unit and eliminating outsourced services or deploying technologies.
It is often implemented to keep firms afloat when there are economic downturns or financial distress. It can also be initiated to help firms stimulate growth and improve profitability.
According to Investopedia, there are many measures firms take to cut costs. They range from slashing jobs, reducing employee incomes, shutting down facilities, to downsizing a business unit and eliminating outsourced services or deploying technologies.
KEY TAKEAWAYS
- Cost cutting measures help firms reduce costs and maximize profits.
- An effective cost cutting strategy entails a clear strategy and good differentiation between good and bad costs.
- Given both the opportunities and threats that layoffs bring, firms need to carefully evaluate the options before making the decision.
Effective Cost Cutting Strategy
1. Clear strategy
An effective cost cutting strategy starts with setting the right targets. It is important to set ambitious yet effective and viable goals to facilitate healthy organizational tension.A report by Deloitte pointed out that a target that aims to save 10 to 30 percent is viable if it is supported by a well-structured program. A program with more ambitious targets can only be successful when there is extensive change and transformation, and high commitment from leadership.
Another key to a successful cost cutting program is the validation of the savings target’s achievability, said Deloitte. It involves breaking down overall goals into smaller chunks and studying specific initiatives and change.
Firms should clearly outline main actions, timing and ownership for each cost cutting initiative. It can be cutting costs in terms of headcount, operating and capital expense, and discretionary or non-discretionary spending.
In addition, firms’ strategy must incorporate important capabilities that help them outperform in the market, according to a report on strategic cost reduction by PwC.
2. Good Cost and Bad Cost Differentiation
In this step, firms need to find out which costs are strategically good and which ones are non-essential bad costs and then build a cost structure.After having a clear strategy that specifies the firm’s key capabilities, it should work on a clear cost cutting agenda. The first thing firms do is to review all expenses. By doing this, they can identify departments or activities that spend the most.
Costs can be classified into the following categories as specified by PwC:
- Not required: this includes non-essential costs that have very low return or used for products/services that customers don’t value much. These costs should be eliminated.
- Lights-on: costs in this category are used to cover activities that help operate the firm. Some are necessary to keep the operation on such as leases, property management. However, there is still much room for savings.
- Differentiating capabilities: expenses in this category are used for significant activities to create sustainable advantage for firms. Firms can spend more on this cost than their competitors in the market.
- Can’t-avoid: costs that firms cannot avoid may include insurance, business licenses, labor costs, among others.
3. Effective execution
According to the report by Deloitte, the success of a cost cutting plan depends on:- Adequate governance:
- Proper tracking
Considerations
Automation
The application of technology and automation help staff save time and become more efficient. Most business leaders in a survey by Forbes believed that automation can save up to three work hours a day. A report by WorkMarket showed a similar trend. 53 percent of employees surveyed agreed that automation can save up to two hours a day.However, it should be noted that automation can also be expensive to deploy. As a result, firms need to carefully evaluate the cost of investment and consider whether it outweighs expenses saved.
Headcount reduction
Cutting jobs is one of the most common cost saving measures that several firms take. Let’s dive deeper into the layoff trend, what might be wrong with it and how firms can adjust it and make it a better strategy:- Massive layoffs
Early this year, many major companies including Meta, Amazon and Alphabet, announced plans to lay off thousands of staff amid concerns over recession.
Meta has carried out a three-part round of layoffs since fall last year. The jobs cut at the company in this round totaled 21,000. They include positions in marketing, enterprise engineering, program management, content strategy, among many others.
Amazon in January also slashed 18,000 jobs in January 2023. This marked the biggest headcount reduction in the history of Amazon, according to CNBC.
However, firms should also be prudent and careful in its layoff decision as this may affect their profit in the long term, according to the Harvard Business Review.
- Issues
There are also negative effects caused by layoff that business leaders need to consider. They include trust loss, and negative impacts on both workers and firms themselves.
A study on the influence of layoffs on the performance of firms showed that a large share of firms that have layoffs do not enjoy enhanced profitability. Another study on 1,000 firms between 2003 and 2007 concluded that layoffs generally do not lead to immediate financial improvements.
PwC also pointed out that layoffs can lead to a “deferred” issue when the firm needs the workforce to return. Moreover, the additional expenses incurred to hire and train new staff are also high.
- Recommendations
PwC recommended companies have a comprehensive workforce strategy. At the same time, it also needs to consider legal implications before executing the strategy.
According to the Harvard Business Review, layoff is the most suitable decision when a company needs to go through restructuring or needs permanent transformation. In case of a temporary downturn, the magazine suggested, furloughs and in-company reassignment is a better decision to make.
Conclusion
Doing business in the time of recession and uncertainties can be very challenging. This turbulent time poses significant challenges to firms.
Many are under the pressure to cut costs in order to maintain their operation in the long term. For some, eliminating non-essential costs is the answer to the challenge. Many others, however, might resort to massive layoffs or leverage the use of technologies and automation.
If your company is struggling with a cost cutting strategy, feel free to contact Consultport. Our great pool of talented consultants help firms come up with innovative solutions and achieve ambitious goals.
Many are under the pressure to cut costs in order to maintain their operation in the long term. For some, eliminating non-essential costs is the answer to the challenge. Many others, however, might resort to massive layoffs or leverage the use of technologies and automation.
If your company is struggling with a cost cutting strategy, feel free to contact Consultport. Our great pool of talented consultants help firms come up with innovative solutions and achieve ambitious goals.
