A cost-cutting program is the surest way to announce your incompetence. Why would you boast about failure? The obvious answer is desperation.
Executives rarely learn much after they reach the C-suite. Cost-cutting machismo has a fatal allure. The reason may lie in their narrow experience. Companies are often led by those associated with former profitable growth, whether or not they were responsible for that happy condition. A downturn confronts them, possibly for the first time, with censure and abuse. They want it to go away. Quickly. Ideally within an annual reporting cycle; certainly during their anticipated job tenure.
What they cannot admit is that their need to cut costs is evidence of failure. It is proof of actions not taken; promises not fulfilled; or events not foreseen. They need a quick solution to block the pain. Here are examples of things they do.
My friend, Mike, was rolling out an ERP program across multiple territories, country by country. It was two thirds complete when the budget was cut. When, two years later, the need to integrate the remaining territories became urgent, there were no longer resources, know-how or anything else that was needed. The business was horribly crippled until a lot of extra money was spent.
In a different financial crunch, external formulators were dropped in order to utilise internal capacity. One of the formulators held the secrets of a how our products were the only ones conforming to global registration standards. (It was to do with crystallography). Within weeks, a Korean competitor had engaged the formulator, solved the ‘crystal maze’, and taken our markets.
When the CFO of a biopharma company decided he needed year-end savings in order to meet promises to shareholders, we in Procurement were asked to give suppliers a ‘haircut’. That meant “Reduce your prices by 10% if you want to keep our business”. Many laughed disdainfully but most found a creative way of allowing us to report apparent savings that cost the supplier nothing. The CFO must have guessed this, even as he ostentatiously handed out a business productivity award to Procurement!
Don’t misunderstand. There is a continuing need to avoid paying more than necessary. It is rarely glamorous or high profile. It requires persistence and determination. The routine need for cost awareness cannot be questioned.
This is about ill-thought-out, knee-jerk responses that do not consider the scope of their impact. For example, when a company or department automates its customer service, it is not always eliminating costs; it may be passing them downstream to customers and clients. This is hardly ever considered in the business case for digitalisation.
Done right, and in a timely way, cost-reduction programs are critical to survival and profitable growth. My mate, Brian, was the supply chain manager for a new blockbuster. Hardly had he sat down to enjoy its success than he was asked to reduce its cost by 30%. This was not a reaction to pricing errors or disappointing sales; it was anticipation of future markets and competition. Brian convened a series of meetings with Engineering, Chemistry; QA; Procurement; Packaging and Logistics so that each would contribute individual savings to the total. The first two meetings were fiascos that nearly broke out in fights. By the third, realising that their individual contributions didn’t add up to a row of beans (and many were in conflict), their eyes opened and they stopped thinking inside their departmental boxes. The solution involved higher specification raw materials, longer chemical reaction times, consolidation of some processes, and flexible use of plant. By recognising the full scope of the problem, including the time dimension, the team proposed a plan to achieve the 30% cost reduction – and some! It became the basis of the product’s five year strategy and drove phenomenal market success over the next fifteen.
This is very different from a badly scoped cost-cutting exercise that is no more than an advertisement of failure and a marker towards further problems.