Thursday, December 15, 2005

In the past 30 years, I have learned a number of basic lessons while working with many large and small, successful and troubled organizations. I believe these lessons often can make the fundamental difference between business success and failure. Please read the following and pass it along to others who may find it helpful.

How Do You Cut Costs After You Have Cut to the Bone? The Top 30 Ways to Reduce Expense

By Fred Leeb
Many companies today are facing extremely tough financial and operating conditions that are only likely to get more difficult. Even more resources will be required in the future to compete for customers, employees, vendors, joint venture partners, business partners, investors, lenders, publicity, and on and on. The purpose of this article is to provide assistance for companies that already have gone through their cost structure and have cut all the fat out but recognize they must find a way to do much more to enable them to grow and be successful. 

The first step is to recognize that further significant cost cuts demand strategic thinking, teamwork, and a sound business plan, the same process required for a growth plan. Otherwise, further cuts will weaken the organization and are very likely to lead to just more cost cutting later on. 

Cost cuts should be a means of strengthening the organization for the future, not just buying time. An experienced consultant can provide the valuable perspectives to help make prudent decisions, the manpower to get the job done with a sense of urgency at a critical juncture, the new ideas and creativity from understanding how many other organizations have faced similar issues and the objectivity needed to counter entrenched vested interests. 

In the list below, the most successful cost reduction methods are listed first and the least preferred (but the most often used methods) are listed last:
  1. Refocus and reduce cost through strategic planning (the most successful method for cost reduction): rank each department or profit center in terms of its current and longer term value (basically, calculate the program’s future return on investment); cut the lowest-ranked areas.
  2. Increase quality to reduce rework, scrap and administrative cost
  3. Take a fresh look at the entire expense structure by utilizing zero base budgeting and/or activity based accounting.
  4. Tap into new ideas from employees--give them an opportunity to provide information without fear of being identified, patronized, or criticized--have a consultant ask for their ideas respectfully and confidentially.
  5. Take advantage of your difficult financial circumstances to renegotiate leases or debt service payments (reduce or defer payments, extend terms, return equipment, request interest-only payments, etc.).
  6. Negotiate feasible monthly payment terms with vendors to eliminate interest and penalties on past due amounts (as part of a sound overall business plan)
  7. Prepare breakeven analyses, take a hard look at all opportunities—revenue (volume, price and mix), variable cost and fixed cost.
  8. Develop a longer term view by preparing contingency plans (e.g., by developing alternative scenarios of 5%, 10% and 15% cuts in operations).
  9. Pay down debt or reduce lease costs by selling off real estate, equipment and/or other underutilized assets.
  10. Gain efficiencies and economies of scale: eliminate excess capacity and duplication of services, expand through vertical or horizontal integration to gain synergies, and gain access to new geographic areas.
  11. Bring more work in- house as opposed to utilizing more expensive outside vendors or outsource more work to less expensive outside vendors, depending on the circumstances.
  12. Centralize or decentralize overhead functions, depending on the circumstances.
  13. Combine with other organizations to pool purchasing power and negotiate lower costs from suppliers.
  14. Reduce “fixed costs” by utilizing the advice of outside experts in areas such as health insurance, phones, office rent, property tax, vehicles, information technology, outside accounting fees and janitorial fees.
  15. Obtain better computer systems to reduce the personnel cost of financial and operational reporting.
  16. Target marketing and advertising dollars most efficiently by preparing demographic analyses.
  17. Keep personnel costs in line with the competition by utilizing salary, wage and benefit analyses available from outside sources.
  18. Generate additional value and reduce expense by implementing incentive compensation systems, instead of using flat salaries and wages, when appropriate.
  19. Reduce administrative cost by listing all reports and then eliminating all those that are unnecessary.
  20. Reduce significant costs by tracking (e.g., posting graphs and monitoring) key operating statistics as appropriate (on a daily, weekly or monthly basis).
  21. Incorporate the best practices of competitors and other similar organizations to reduce cost.
  22. Reduce managerial personnel cost by expanding the number of direct reports per manager (flattening the organization).
  23. Reduce the number and length of business meetings and the number of attendees at each meeting.
  24. Require all employees to report how they utilized their time (the tasks they completed), on an hourly basis, for one week each quarter.
Least Preferred Cost Reduction Methods
  1. Increase employee oversight and discipline by requiring all employees to utilize a time clock.
  2. Freeze salaries, decrease employee benefits, increase overtime for exempt employees, postpone hiring, increase reliance on contract employees and part-time staff who are not provided with benefits.
  3. Cut all capital expenditures, repairs and maintenance, employee training, new programming, marketing and consulting fees.
  4. Require the managers of all departments to devise their own means to reduce expense by a certain percentage or dollar amount.
  5. Require that all expenses be reduced by a specific percentage across the board.
  6. Wait for a miracle
The Bottom Line

As stated previously, cost cuts should be a means of strengthening the company for the future. An experienced consultant can provide:
  • Valuable perspectives to help make a prudent decision,
  • Manpower to get the job done with a sense of urgency at a critical juncture ,
  • New ideas and creativity from understanding how other organizations have faced similar issues,
  • Objectivity needed to get past roadblocks and vested interests and gain the most value for the organization as a whole, and the
  • Confidentiality for your employees so they can be forthcoming with many new ideas and procedures without fear of criticism or retribution.
The best leaders are those constantly looking for good ideas everywhere and learning from others.

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