My close colleague, Gene Siciliano (our “CFO for rent” at www.cfoforrent.com) is an excellent strategist, consultant and speaker. His website is filled with resources and articles, and you can sign up for his newsletter. I wanted to share this article with you about his strategies for cost cutting.
It’s a recession, and a really bad one at that. Ask the experts how long it will last and you’ll get everything from 5 or 6 months to 5 or 6 years. Once thing is certain, and everyone agrees – it won’t last forever. So what do you do with that not-so-helpful information?
I have some ideas for ways to avoid some of the common mistakes of past downturns, and get a head start on your competition at the same time.
Financial strategy for any company in these uncertain times should consider the company’s fundamental strength in designing a cost control program. Across-the-board cost reductions, so common at these times, are easier to initiate but much more damaging to the company’s foundation. Here is our recipe for an effective cost reduction program:
1. First, staffing reductions should be focused on marginal performers throughout the workforce. This is an excellent opportunity to relieve payrolls of under-performers with minimal risk of backlash or legal exposure. If you have delayed having a confrontation with these people or their managers, do it now. (Ed: Your legal exposure, of course, is based on your individual situation, and you should always consult a labor attorney in questionable cases)
2. Secondly, cut costs in areas that will not impede your recovery or affect critical current programs. Cut these sharply or eliminate them entirely. Examples: Planned enhancements to employee benefit programs (even if announced), replacement of inefficient equipment that still keeps up with demand, refinancing of corporate borrowings at the new lower interest rates.
3. Next, cut activities that must be retained but can be delayed or reduced to an inactive state for 6 to 9 months. Example: Accounting system conversions can be shelved for now, even if the software has been bought and paid for, thus saving thousands in implementation and training costs. This assumes the prior system isn’t crippled and unworkable in the interim.
4. Finally, consider investing money in beefing up programs that can benefit the cost control program or add power to your readiness for the recovery. Examples: Finish the partially completed development of a new product that will be the market leader in a high demand environment when it ships; hire a few outstanding people in critical departments not previously impacted by the layoffs. In other words, feed your winners.
Here is the point of all this: You want to protect yourself during the downturn while preparing yourself for the recovery. When that time arrives, you want to be in a position to move out aggressively, take advantage of your weakened competitors, and add market share and profit margin. It is important to think strategically at these times, because when this is over, it’s going to be a very good year.
