Relentless Cost Cutting Will Kill Your Business

Eliminating waste and unnecessary cost inside your business is critical to its long term growth, profitability and success. However, primarily focusing on reducing cost will eventually kill your company.

As Gordon Bethune said, “You can make a pizza so cheap, nobody will eat it. You can make an airline so cheap, nobody will fly it.” The king of corporate turnarounds, Greg Brenneman, supported this with his statement “a maniacal focus on trimming cost can lose you more revenue than you gain.”

This was certainly my experience back in 1998 when I was brought in by a client to redo engineering work that another contractor had outsourced overseas. The contractor was looking to reduce their engineering costs by sending the bulk of their engineering to a lower cost country. Unfortunately, they did not control this work close enough. When the engineering was submitted to the customer, not only did it not meet expectations, it caused the client to loose so much confidence in the contractor that the contract for the work was pulled and awarded to another engineering company.

Essentially, the original contractor made a pizza so cheap that no one wanted to eat it!

How Relentless Cost Cutting Will Destroy Your Business

Relentless cost cutting will destroy your business because it:

  1. Takes the focus away from the customers . . . the very people you are there to serve and the people who pay you for your services and products.
  2. Casts a pall of despair over the entire organization
  3. Sucks the life out of the organization
  4. Forces everyone to justify their jobs rather than providing value to the organization. This results in people climbing up the corporate ladder and “kicking down” everyone on the ladder below them.
  5. Inhibits business development and sales from doing their job and finding new customers
  6. Creates a gossip grapevine of employees trying to guess what sort of diabolical actions management has in store next

What to Do Instead

Instead of relentlessly reducing costs, focus on taking the following positive and proactive actions:

  1. Deliver what was promised to the customer. Keep your existing customers happy and you will get repeat business. 80 to 95% repeat customers is a good target for a service based company.
  2. Find new markets and new customers. Instead of focusing on reducing your cost base, focus on expanding your client base.
  3. Increase your sales by determining what other products or services would be beneficial to your existing customers and selling more to them. What pain points do your customers have that you haven’t addressed yet? How can you remove this pain?
  4. Become more efficient without impacting the quality or timeliness of your existing products and services. Are there areas in your business that are wasteful and need to be cleaned up? If so, take action and remove this waste and unnecessary cost. However, keep in mind that it’s one thing to remove inefficiencies but cutting too deep will “create a pizza so cheap no one will eat it!”
  5. Rally employees around the vision, mission and values of the business.
  6. Have employees focus on what they can control and impact rather than all the negatives out there that they cannot control.
  7. Celebrate successes and wins with everyone in the business! This builds momentum!

Stop blindly cutting costs just to be the low cost provider without clearly understanding your customers’ requirements and their desires. Instead, spend your energy focusing on serving your customers, finding new customers and markets, celebrating your successes, and building business momentum!

…you get at least four times the market value for a dollar of profit that comes from revenue growth versus a dollar of profit that comes from cost reduction. Greg Brenneman

Leave a comment below on how you have been affected by relentless cost cutting.

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4 thoughts on “Relentless Cost Cutting Will Kill Your Business

  1. Cost cutting generally occurs for three prime reasons:
    – Natural cost reductions directly linked to process efficiencies, new technologies, or automation
    – Strategic cost reductions from scaling due to elimination of duplications eg. mergers or outsourcing
    – Enforced cost reductions due to downsizing, as a consequence of reduced sales and market share, or forced competitive margin reductions.

    In the article, reductions that are made solely for political reasons such as shareholder value, or ideological reasons such as maximising margins and short term profits, have little or no relation to the business operational requirements. Such actions often destroy market flexibility and competitiveness of an existing functioning business model, and can literally crash the business.

    Covid:
    With the Covid ‘shock’ many companies and SME’s will initially have reduced growth or sales with no corresponding reduction in fixed costs (eg. rents – that are contracted for long term). In the short term they will have to resort to freezing costs or downsizing reductions to maintain cashflow, unless government support mechanisms have been put in place and taken advantage of. As in the article, staff need to be be fully informed, to understand the local effect, and be motivated to help support any required operational and sales reorganisation, to discover new solutions, and to assist in reforming the company to take advantage of the new circumstances wherever possible. The judgement calls are how long the crisis will last, how fast can the company respond, and what will be the new market environment afterwards.

    Wherever there is a downturn in one area, there is usually a upturn elsewhere, the trick is to find out where… Covid is inspiring many people change their investment strategies, often to maintain security of asset values, reduce ‘exposure to ongoing Covid risks’, and also take advantage of the resulting changed markets… however the absolute investment amounts though volatile, and perhaps with a larger volume ‘moving’ or velocity, are still the same, if not larger… If a company can take advantage of good predictions and modelling, perhaps inspired by existing staff and clients, and new external resources, then there are huge market share opportunities to be gained… As always flexibility, observing and following the fast changing markets as far as possible are main keys to success.

    Whatever happens market defined product quality must be maintained, if not improved… Visibly helping existing clients get through this period will likely have large future benefits.