Cost Cut your way into Bankruptcy
Companies love cost savings! Wall Street loves cost savings too! The problem is that cost savings don’t keep the company healthy. Companies often cost save their way right into bankruptcy. How do you decide whether to pursue cost savings or try to increase revenue? And why do you care if you are not part of the decision-making process, you’re simply working on the project assigned to you?
Consider this, you have $2M to improve profits. You can either decrease cost by $5M or increase revenue by $5M. Which do you choose?
Answer: always choose the revenue.
Why should you choose the revenue? It’s the same amount of benefit right? $5M either way. The reason we choose the revenue is that the upside of increased revenue is unlimited, but the upside of cost savings is limited by the current cost. You can save more than you are spending, but with earnings, the sky is the limit.
Why do so many companies choose cost savings? The cost savings is a sure thing and the revenue...well what if our new products don’t fly? New products are much riskier than cost savings. Cost savings are the safe bet for people’s careers. Unfortunately, this is an example where career development is at odds with what’s best for the company.
A focus on cost savings puts the company at risk.
What assumptions do we make when we choose to focus on cost savings? The big assumption here is that all dollars are equal. A dollar saved is a dollar earned. The fallacy in this assumption is that a focus on cost savings can expose the company to risk. What are we exposing the company to by focusing on cost savings?
Cost savings can often negatively affect a company’s revenue. For example, a reduction in quality can lose customers. An increase in revenue does the opposite, it can actually open new doors, move the company into new markets or new customers.
On the flip side, by focusing on cost savings, the company may suffer from myopia, effectively putting blinders on. They may fail to see changes in the market and new opportunities. They may also have trouble jumping on new opportunities. It’s difficult for most organizations to quickly divert funds and people from cost savings and pivot to a new opportunity.
Why can’t we do both? Most companies say they want to do both. Yes, you should absolutely do both. The difference is that cost saving needs to be part of your operating cost, part of everyday work. Finding new revenue and new markets is an investment. I say this as a person who makes a living from ‘process improvement’, but this is really not an initiative. Of course, changing to a ‘continuous improvement’ culture might be an investment, but continually spinning up process improvement initiatives is a mistake.
What about all this waste? There’s so much waste! We should just fix it! It would save us a million dollar, let’s just do it, it’s a no-brainer! Yes, we should. Just be really clear on what the trade-off cost is to put energy into getting rid of waste instead of putting it someplace else.
Why do I care? I’m just doing my job. An ongoing theme in this blog is ‘taking responsibility’. We all have the ability to influence decisions, even if we’re not at the top of the hierarchy. Find others who agree and use your collective voice. I recently worked with someone who took their cost savings project and turned it into a revenue generator. The insights they gained from their analysis led to the development of a new product. Be open to the possibilities and you will find them.