How to Cut Costs Without Drawing Blood
Six ways to use money and assets effectively
When times are hard, and business is slower, harder to get, and less certain, many companies engage in slashing costs. And they go for that which is most visible and easiest to slash first – the payroll. However, reducing staff numbers incurs considerable expenses – you have to pay people out, you lose goodwill both with those who are let go and with those who survive the purge, and your capacity and capabilities are reduced – all at the time you need these things most!
An article of the same name by Tom Copeland appeared in the September/October 2000 issue of the Harvard Business Review. This gives excellent ideas and insights into how companies can cut costs, without having to lay-off experienced staff with the attendant costs.
- How is your capital budget spent? Often over 80% of most companies’ capital budgets are made up of small items that get rubber-stamped in the budget process. Much of this, is unnecessary gold-plating or even redundant because it merely duplicates spending elsewhere in the organization.
There is a great story about a telecom company that buried its cables at a depth of two meters. When asked why it was necessary to dig so deeply, managers replied that only at that depth would the cable be protected from a thermonuclear explosion. After reflecting on the bomb’s likely impact on customers, the company cut its cable depth to a meter, saving itself $80 million a year as a result.
- Be frugal, not cheap – when looking at small-cost items you can save substantial amounts over time. However, do not look to buy cheaply, you will often find this will cost more over time.
- Is each piece of capital expenditure necessary? You need to be clear here on what specific needs it will fill; the specific problems it will solve; and how much will it save in terms of resources, both hours and dollars?
- Eliminate all redundant purchases. Within certain discretionary limits, many people are often authorized to purchase the same items. Look at how you can consolidate these purchases to eliminate duplications.
- Determine precisely what the total cost is. Price is only one part of the total cost. By viewing your purchases as investments, and including the total costs of ownership for the lifetime of the assets, you can determine the ROI of each capital asset purchase.
- Maximize the use of shared assets. Look at who is using these assets and how over time. Where are the assets which are being underutilized or overutilized? What are the options for handling assets in these areas?
Look at your capital expenditure. Where and how are you spending your capital budget? When answering these questions what are the potential savings you can make without having to lay off people? Can you cut costs without drawing blood?
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