There is no question that Covid-19 has or will result in a cost optimisation exercise for many companies.
Temporary freezes on new hires, renegotiation of key contracts, review or delay of CAPEX investments, optimisation of inventory levels or cut of performance rewards: here is a snapshot of some measures that organisations have already taken to respond to the situation.
These are examples of typical tactical short-term oriented cost-saving action. Nevertheless, there is more to tell about the cost story: while short-term initiatives are necessary to cope with the current situation, a more structured and strategic reflection on cost models is needed to boost recovery and prepare business to thrive during these uncertain times.
Consequently, business leaders have found themselves scrambling to cut costs and reduce risks not merely to sustain profitability but for their very existence in most cases. Every single business entity needs to have a plan to cut costs in such an inflationary operating environment.
Timing
In general, when is a good time to start optimising 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 cost-optimising initiatives to sustain performance?
While cost optimisation 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 optimisation 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 organisation’s culture will see gains that can be sustained over the long term.
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.
Easy options
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 in order to remain competitive.
Every person in a company has a role in cost management regardless of the job level but these responsibilities are typically unclear in many organisations.
A clear strategy and open communication are vital for the success of any corporate project, but even more so around cost-cutting initiatives, where employees understandably can feel threatened by change.
As 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.
The corona-virus pandemic has caused many supply chain disruptions. Costs have escalated beyond comprehension which business leaders need to respond to on a concrete plan rallying every single employee around it.
In conclusion, at the end of the day, it is very important to understand the relationship between cost and value – be it a pandemic environment or otherwise.
The decisions that you make should take 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 where 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.