LEADING THROUGH CRISIS
How to cut costs to thrive,
not just to survive
APRIL 23, 2020 | BRENDA VAN CAMP
In times like these, you frequently hear leaders talk about right-sizing their company in response to the economic downturn. Perhaps you have already received an email from the c-suite with the missive that “the company as a whole needs to find 30% in savings across the board to keep costs in line with the projected lower revenues.” But making cuts “across the board” is a dangerous knee-jerk approach. While it may feel more “fair,” that is not the goal?
The goal is to realign the company’s cost base in a way that better enables it to weather the storm and position itself to rebuild afterward. So, the aim is to be strategic, and in this week’s post, we will discuss a two-part framework to ensure you cut costs in a way that will enable your organization to thrive again in the future ? not just survive.
Table of Contents
Part 1: Re-validate your direction
What are the resulting shifts in the needs and overall demand for our products & services?
How does this shift affect how we differentiate ourselves from other players?
How does this shift affect our customer segments?
How does this shift affect how we produce & deliver our products or services?
How does this shift impact our various sales channels?
Part 2: Cut with surgical precision
Get specific about which exact capabilities underpin your company's ability to deliver a differentiated value proposition.
Distinctive capabilities don't tend to fit neatly into budget lines.
To do this, you first have to categorize each cost into one of four cost categories, based on the Fit for Growth cost-optimization model developed by Vinay Couto, John Plansky, and Deniz Caglar.
- Differentiating capabilities: Expenditure for activities to develop and maintain distinctive capabilities
- Table-stakes:Costs to enable activities to be a viable player in your industry.
- Lights-on:Expenses incurred to operate your organization day-to-day, such as legal and facilities costs.
- Not required: Any expense that’s not needed, including executives frills, nice-to-have employee perks, non-strategic initiatives, and pet projects.
Once you have categorized all your costs, the next step is to re-evaluate the optimal level of expenditure for each cost. Given that we want to protect our distinctive capabilities, the aim should be to find opportunities to save in the other three categories. However, when doing so, be aware that our own bias can get in the way of making the tougher calls.
For example, when considering cutting initiatives that are no longer deemed strategic, leaders often struggle to pull the trigger because of what economists call the sunk cost fallacy. This is our tendency to continue investing in a losing proposition because of what it has already cost thus far. Instead, the only real question should be, “knowing what I know now, would I still make this investment.” The answer is generally no.
Taking an across the board approach to your cost-cutting may sound fair, but can ultimately end up doing more harm than good by cutting in areas that are critical to your company’s ability to regenerate growth.
Fit for Growth: A Guide to Strategic Cost Cutting, Restructuring, and Renewal, by Vinay Couto, John Plansky, Deniz Caglar