When is a good time to start optimizing costs? Is it ok to ignore costs when your business is riding high? Or should you wait until the signals are clear that demand has fallen and costs have escalated before you begin the necessary cost-optimizing initiatives to sustain performance?
While cost optimization should be a priority for all companies regardless of the economic cycle and should be a daily activity, the reality is that when times are good, it’s on the back burner, and during a downturn, it becomes critical.
The other side of the story is that the very same companies that had cut costs previously for various reasons allow fat to build in when volume and profits grow.
Basically, cost cutting in Sri Lankan companies has been cyclical. This is a major weakness of Sri Lankan companies. Should you wait until the ship is sinking before plugging your profit leaks?
Mind-set
One of the first things that managers need to change when approaching cost optimization is their mind-set. It helps to think of cost-cutting in terms of a weight-loss program. You may temporarily lose weight on a crash diet and aggressive workout schedule, but to maintain the right BMI over time, you must adopt a healthy lifestyle and diet over the long term – it should be a daily commitment.
Similarly, only managers who take the time to examine the cost structure throughout their business and embed cost discipline within their organization’s culture will see gains that can be sustained over the long term.
Difficult areas
It is not easy to compete in the market today. Sometimes it seems that a company gets one set of expenses under control, and in the meantime, another area of the company begins experiencing cost overruns. It is a never-ending battle to maintain company profitability.
Companies need more insight into what drives costs in their business to ensure that cost-cutting is targeted at the right places and that the success of cost management initiatives is properly measured.
Companies often pick the easy options for cost initiatives, rather than the ones that will yield the most savings.
While budget and headcount reductions provide short-term cost savings, reducing complexity and improving process efficiency can yield significant and lasting benefits, but only if they are conducted rigorously and continuously.
Companies must also be prepared to adopt major changes to their business model to remain competitive.
Responsibility
Every person in a company has a role in cost management regardless of the job level, but these responsibilities are typically unclear in many organizations.
A clear strategy and open communication is vital for the success of any corporate project, but even more so in cost-cutting initiatives, where employees understandably can feel threatened by change.
As a part of this holistic view of costs, managers need to take responsibility for change beyond their own department and employee rewards around cost incentives must align with the business strategy.
At the end of the day, it is very important to understand the relationship between cost and value.
The decisions that you make should take both cost and value into consideration. If the value created by engaging in a specific activity is higher than the costs caused by that activity, it is advisable to engage in that activity.
It is, however, never recommended to engage in an activity whose costs are higher that the value that will be created by that activity.
It is a principle that should always be considered in all cost management decisions.