6 Effective Steps on Cutting Costs

In today’s ever changing world, full of technology, disruption and rapid economic cycles, it is inevitable that as a leader you will have to face times of cost-cutting.

While cost-cutting is often difficult and emotional, strong leaders deal with it in an authentic and open manner.

They use it as an opportunity to refocus efforts on what is most important so that their organisations emerge stronger.

Here are six guidelines that a business leader can follow during times of cost-cutting measures.

Step 1: Be open

Explain the dynamics of the business to the team and the need to cut cost in a straightforward and transparent manner. Use specific data and examples.

Respect the team enough to allow them the opportunity to make their own conclusions on whether the need to cut cost is legitimate or not. Only a shared conclusion will set the stage to a productive process as you move forward.

Step 2: Be authentic

There is no faster way to lose credibility than to force blind optimism on your people. You need to exude confidence that this is the right thing to do.

However, be balanced and acknowledge that this will be difficult and will have its share of trade-offs and negative impacts. It is not a perfect world and you need to be human in the process and acknowledge sacrifices.

Be an open communicator throughout the process. It is essential to remain trustworthy and authentic.

Step 3: Fix annoying things first

There is no perfect company and if you talk to anyone at any company, you will hear a litany of complaints, frustrations, broken promises and actual ideas of what will make things better.

This is where your cost-cutting efforts need to begin. Start with addressing areas of process improvement that will make the lives of your people easier.

It is important to start from a place of fixing the annoyances, as this will give you the goodwill that you will inevitably need to cash in when making tougher decisions.

Step 4: Focus on the team

It is important to involve the team as much as possible. Each team member should directly own an initiative that contributes to the overall mission. They need to drive the car and not just wait for it to reach its destination.

You are in this together and allowing the team to own projects such as vendor negotiations, process re-engineering, product redesign, pricing and commercial offering changes are all great areas to start.

It is important that the team focuses on driving something tangible that they can contribute during this tough time, or they will quickly get distracted and swallowed by the difficulty of a cost-cutting environment.

Steps 1 through 4 are meant to start the process with as much focus and productivity as possible. They are important because they focus on getting the team ready for what lies ahead, no matter how difficult things can become.

Step 5: Prioritise things that matter

Cost-cutting exercise is tough, so while you are going through this difficult time, make sure you are going to come out of this stronger in the end.

Use this as an opportunity to get razor-focused on what drives value in your business (and what doesn’t) and then aggressively eliminate the non-value add.

My suggestion is to start with doing a full assessment of everything that is driving cost in your business.

Ask yourself the questions in Figure 1.

It is important to frame your efforts with these simple questions in order to focus priorities clearly and eliminate the tendency to justify old ways of doing things.

The justification for anything must be a clear case of benefiting employee engagement and customers, or fulfilling the long-term strategic vision. Everything else is secondary and up for trimming.

Step 6: Cut deeper and invest where you need to

Despite difficult times, it is important to remain steadfast in your focus and to continue to spend where needed. The items (in Figure 1) that you answered “yes” to, form the foundation of where you need to focus your investment efforts.

If you need to cut 20% of cost, then aim for 30% and continue to invest the 10% in those key initiatives that drive employee engagement and customer satisfaction, or efforts that are integral to executing the organisation’s long-term vision.

This is extremely difficult and the hardest part of cost-cutting. You will endure much criticism for continuing to spend on key initiatives while making structural cuts and announcing lay-offs.

It is important to stay focused and not allow your short-term environment to dictate your long-term vision. In other words, you must continue to invest even through difficult times.

Concluding thoughts

With cost-cutting, there are often very complicated issues that are difficult to decipher.

Strong leaders drive clarity during these times and focus the business on what is most important. These six steps serve as a guide to reinforce that focus.

It isn’t easy and there will be sacrifices, but the more you can focus on your core business and your long-term success, the better off you will be.

Doing this will allow you to use this difficult time to actually improve your business in the long run.