Article in SmartCompany about cutting costs by Leon Gettler on 28th February 2012
Workers at Alcoa’s Geelong smelter are now waiting for pink slips and their counterparts at Toyota, Holden, Telstra and Westpac are losing their jobs. BHP has warned of more closures of struggling assets and development spending cuts as it seeks to deal with falling commodity prices.
With economic uncertainty comes the season for big cuts. Costs are on the rise and the economy is dragging. Some forecasts say that the official unemployment figures could rise to six per cent.
But specialists say there are better ways to reduce costs. Sure, cutting staff numbers is obvious and easy. But it’s also a morale buster.
Mark Allsop, a partner at Deloitte Private, says the problem with staff cuts is that it returns to bite the company when the recovery comes, and recoveries tend to happen quicker than expected. In any case, he says, it has ripple effects through the broader staff pool.
“My starting point with clients is that head count reduction, unless you have a whole lot of flesh in your workplace, should be the last thing you look at,” Allsop says.
“It’s easy to cut heads as a line item in a spreadsheet but the impact of losing that staff member is that you lose relationships that the staff member had with key stakeholders and you lose operational knowledge. Cutting the head count to meet a short-term imperative cost often has long-term repercussions and the cost of rehiring when the economy has turned is expensive.
“We always encourage our clients to look at other cost areas that they may be able to reduce in the short term.”
Business should look at three things to cut costs: staffing, rent and capital equipment. Here are 10 ways companies can do it.
1. Put full-time staff on part-time
Many companies did this when the global financial crisis hit in 2008.
Firms like KPMG have been offering staff part-time options as a way to cut costs. Getting people to cut their working time by only one or two days a week can produce big savings. It also ensures brain power remains in the organisation and it helps maintain employee morale.
As part of this strategy, the company can introduce job sharing where business reduces the number of jobs in an area while retaining full-time coverage. With job sharing, two people work part-time hours in what is effectively one full-time position. Again, this potentially produces savings with little impact on the operation.
Still, there are risks. “You are reducing productive capacity,” Allsop says.
“If you’re turning five days into four, there is less capacity to get things done.” He says getting staff to go on sabbatical is a possibility but there is a risk they won’t come back.
2. Roster for staff efficiency
John Downes, a boutique strategy consultant, says companies should look at their rosters to see if staff are being used effectively.
“One of the most critical things they can be looking at is roster profitability. That’s a function of having the right staff on at the right hours so there is no wasting valuable resources at quiet times of the day,” Downes says.
“It’s about looking at the cost per sale from a labour cost perspective. It helps business owners understand that if they are doing a roaring trade on Saturday and Sunday and don’t have enough staff and are losing sales, but see two staff opening the shop on a Monday, then that’s a waste of money and their choice is should we open on a Monday or Tuesday or should we open with one person.”
3. Capital equipment
Consultant Joel Barolsky says the ultimate goal is not to necessarily reduce cost but to improve profit. One way is to look at ways to slice and dice equipment costs.
“You might look at creating ways of dealing with your equipment that reduces your outlay and create cash flow. You might want to sell it and then lease it back. There might be some creative ways of dealing with your equipment that reduces your outlay. Nowadays a lot of software is moving to a subscription base so instead of outlaying significant amounts to buy a computer system, you can now pay a monthly subscription.”
That generates tax deductions and cash flow.
4. Separate good costs from bad costs
Making the distinction between the two is critical but first of all you need to work out your strategy.
Kevin Dwyer, who runs the consultancy Change Factory, says that knowing your goals over the next two to three years means you can work out where good and bad costs are.
“If my goal is to grow the business by 150% over the next three years, and if I want to grow it by 80% next year, then I wouldn’t be cutting my sales staff,” Dwyer says.
“I might have something like a sponsorship with a box at the MCG which is good for brand building but if there is a lot of residual awareness of the brand, it doesn’t really give you the sales. So I would trade my MCG box but keep the sales guy.
“If, on the other hand, my goal was to really increase my share of the customers’ wallet, I would be looking to design new products whereas the sales guys won’t help me.”
Dwyer says one of the big mistakes many companies make in hard times is cutting the marketing budget. It’s telling the market that they don’t want to grow, he says.
“They go into survival mode but it’s a very poor survival mode because the market is shrinking. So we have 100 companies in a shrinking market and if 90 of them cut their marketing and 10 increased their marketing, which of the 10 do you think will get a bigger market share?”
That said; marketing is a long-term investment. Like the capital outlay for new computer equipment, marketing can be deferred when the economy is rocky. Dwyer says, in that case, the companies should identify good and bad costs in marketing.
“You can cut your marketing budget by being smarter about your marketing,” he says. “Maybe you don’t do the TV ads which are about brand awareness but you do all the store-based stuff because you know that drives purchase.”
5. Negotiate with suppliers
Allsop says the start of the year is always the time for businesses to talk to their suppliers to see if they can get a better deal. If not, you can shop around.
“Test the market for new suppliers to see if they can get better terms of whatever contracts they have in place. But there’s a balance too. You don’t want to cut off your nose to spite your face.
“If you have a good supplier, you wouldn’t want to nail them too hard in a deal because it may affect their capacity to supply you but it’s good to test the market to see what deals are out there so that you can negotiate with your good suppliers and your bad ones in an informed manner.”
6. Getting staff to go on enforced holidays
Staff can be encouraged to take holidays. It’s good for the balance sheet.
But, in some cases, the company can make deals where staff members take a mix of paid and unpaid leave. For example, someone might take four weeks paid leave and two weeks unpaid. Potentially, it could create massive savings if everyone did that. But it has to be handled with care.
“You need to be mindful of how you structure that so that it doesn’t affect your business continuity,” Allsop says.
7. Making sure staff work efficiently
Dwyer says he sees many companies where employees are not being used to maximum efficiency.
He says one of the worst areas is sales, where sales people spend much of their time chasing up accounts because they happen to have a relationship with the customer. Administration should be doing that, freeing up the sales person to bring in more money.
“Technically, I find that sales people are spending only 60% of their time or less selling,” Dwyer says.
“If I can get that up to 70 to 80%, I would get more customers and sales working more efficiently and I will make more money.”
Downes says small business owners need to be on top of staff performance: “The astute businessman would have a pretty good handle on how staff is behaving and how his management team is behaving and how his supervisors are performing.
“He should take time on a monthly, if not weekly, basis the opportunity to take a temperature test of the organisation to understand how the business is performing and how staff are performing and how staff are coping with challenges. Quite often you see business owners quite happy to bury themselves in the office which means they don’t have their hands on the business.”
He says he does one big test with clients.
“The thing I often do with my companies is ask them, ‘if you had the opportunity again, would you employ this person?’ We will go through an employee list of anywhere between five to a hundred staff and literally go through it line by line asking that question.
“Let’s face it, you might have an employee with you for five or 15 years and it may be that they are no longer challenged. With the implementation of training programs or with a change in job sharing or with good counselling or mentoring by senior managers of the team, you can take some time to find what it is that excites the employee.”
8. Cutting deals on rent
Downes says landlords are more willing to cut deals these days with the high level of vacancies. But he says any business planning to get a better deal needs to plan it well in advance.
“There are some special deals the shopping centres are doing to attract good quality tenants,” Downes says.
“If they start thinking about it six months before the lease terminates, they can put themselves in a position where they have the upper hand. The key is to start early. If you do it the month before your lease is coming up for renewal, then it’s too late and they have the upper hand.”
9. Review all operational expenditure
Allsop says this should be done regularly, not just in tough times.
“Good practice would say that you should be looking at your operational expenditure on a frequent basis to be as efficient an organisation as you can,” he says.
“Things like that should be part of an annual cycle where business looks at what costs they have and where they can trim.”
He says areas that should be reviewed include technology and equipment. Fax machines can be replaced by scanning equipment, accounts receivables can be put on e-payment systems and recruiting can become more targeted, perhaps using social media and other networks, so that businesses are not confronted with hundreds of job applications when they place an ad.
10. Separate personal finance from business finance
Allsop says small business owners need to do this if they want to cut business costs.
“What a lot of them could do is unbuckle their personal and business finance,” he says.
“The personal finances of the owner and proprietor and the business finances often get intermingled so it’s hard to separate a personal cost from a business cost. But they need to have that understanding in order to cut business costs.”
So, there you have it, 10 possible ways to cut costs.
Still, it should not be done without thought. Downes advises to think it through.
“The question you have to ask as a business owner is; are you making a real economy or are you making a false economy?” he says.
