Cost reduction is the easiest and most certain way to increase profits in the short-term. It can also be a major driver of long-term growth if handled properly.
Cost reduction works well for long-term profits, so long as the process becomes a core belief of the entire company and is constantly readdressed. The selection of cost reductions targets is key, since cost reduction over the long-term cannot undercut a company’s profit-making capabilities. Instead, the focus should be on constantly paring away unnecessary expenses, increasing efficiencies, and streamlining processes. In addition, it helps to continually reinvest some portion or all of the the cost reduction savings back into the company’s people, processes, and technology.
On the other hand, cost reduction can sometimes earn a bad reputation, if handled incorrectly. The worst form of cost reduction is the blanket percentage cost reduction that is imposed throughout a company. This sort of cost reduction has three bad effects:
- Any area of the business that has voluntarily reduced its costs substantially, must now find a way to cut expenses even further, probably to the point where it cannot complete its assigned tasks.
- Managers who have experienced multiple rounds of these imposed cost reductions then realise that their best hope of survival is to pad their budgets.
- A blanket cost reduction tends to result in the elimination of “soft” expenses that are needed for long-term growth, such as staff training, or investments in business development.
The affects afore-mentioned can be eliminated through the use of a more targeted cost reduction program.
In the final analysis the old saying that it takes money to make money rings true. Accordingly, the emphasis is not necessarily on reducing costs by rather on reapportioning the costs to maximise throughput, which results in the highest possible levels of profitability.
(Steven M. Bragg)