Seven cost-reduction techniques to improve profitability
Today’s business environment is challenging and forces companies to make difficult decisions. In a time of slow growth, improving profitability often requires a focus on cost reductions. Whether a cost reduction initiative is driven by “top-down” mandate, or the management team recognizes the need for downsizing, these seven proven techniques can yield savings in a systematic way.
1. Examine spend analysis by vendor
This presents insightful findings at the macro level that may otherwise be concealed in inventory or expense accounts. Determine whether any spending can be consolidated to achieve more competitive prices, or whether a service can be eliminated when it doesn’t add much value. Also, evaluate whether specific services or products can be put out to bid. Nevertheless, don’t only look at the price; it’s imperative to look at the total cost, including payment terms and volume or quick-pay discounts. Finally, investigate whether suppliers will consider consignment to improve working capital management.
2. Evaluate return on investment analysis
Get in the mindset of asking, “If this were my money, is this expenditure providing me with an adequate return?” While many activities will generate some return, what are the best returns among all choices? Return on investment analysis is often the best way to evaluate and reduce advertising costs and other marketing expenditures which can lead to improving profitability overall.
Decision-makers may be confronted with the “we-can’t-afford- not-to” argument by entrenched defendants of any given historic investment, so leadership must balance the long-term investment horizon with the short-term liquidity window to meet both objectives.
3. Conduct a benchmarking analysis
If you’re facing strong resistance to cost-cutting, data from a benchmarking analysis can show, starkly, how your organization compares to peers. Reducing employee benefit spending is a typical example, and a benchmarking analysis can help you determine whether your overall costs are high, such as in the top quartile, or indeed close to average.
Whatever your company’s objectives for cost reductions, benchmarking will help you make hard decisions in an objective, thoughtful, and methodical way.
4. Look at actions instead of dollars
Study and review activities that are not as meaningful or ones which you can stop. This is often the best way to identify areas where employees can be eliminated. In other words, what activities can be eliminated that free up labor time and increase profitability? Also, consider the potential for outsourcing activities. For personnel costs in particular, it’s often advisable to eliminate a “fixed” expenditure for one that is variable- based on the level of activity needed. For example, outsourcing information technology support often results in lower costs and better service, subject to longer response times on occasion.
5. Don’t forget risk mitigation and risk management techniques
Analyzing preventive maintenance for long-term cost efficiency often falls into this category of analysis. For example, maintaining a database of machinery and equipment preventive maintenance measures and reviewing historical data for major repairs and how they can be prevented may save you a huge unwelcome repair bill if you incur the smaller routine maintenance expense as you go.
6. Look at cost across the organization — not just line items in isolation
We always encourage our clients to look at the entire cost structure as they analyze expenses — sometimes spending more money in a certain area will result in overall savings which can lead to increased profitability. For example, in most organizations operating at a staff level that results in a 5-10 percent level of overtime is most efficient to maximize margin. If the organization operates with a “no-overtime” edict, this may result in lost opportunities on the revenue side and/or higher total compensation costs due to overstaffing.
7. Review symbolic expenditures
Look at items that may not be significant from a dollar perspective but that employees notice, such as company-owned luxury cars, first-class travel, and other executive perks. Eliminating or curtailing such expenditures will help gain buy-in from different parts of the organization. Don’t forget to review company-paid credit cards and other payments or reimbursements that have no approval process. One caution: Be mindful of curtailing certain low-cost expenses that employee’s value. For example, discontinuing subsidized parking might save you money but adversely impact morale such that it may not be worth it.
Today’s business environment is challenging and unpredictable. Even profitable companies can miss early signs of distress. From volatile market conditions to rapid liquidity declines, our restructuring and transformation services group recommends facing times of slow growth with these seven techniques to reduce costs and improve profitability.