The urge to cut costs

imageRecently, during a dinner with some senior MNC friends, a discussion led to the question of comparing a cost effective model with a growth model. Normally, I do not write about these management questions. Most people do not have any interest in them, whatsoever, and I myself find them very boring. However, in this case, I thought it incumbent to record my learnings, as it may help someone in the future.

Right at the outset, let me declare that I find it amazing that some big management gurus tilt towards cost effectiveness, while in my opinion, cost cutting is only an occasional tool to boost efficiencies (for minimal periods) and can never create sustainability, as compared to a business growth model, which leads to longer term sustenance.

The answer in sums is so simple. Fixed cost will be, say 10% of the total revenues of the company. A substantial saving in these will lead to an overall increase in bottom line by approximately 1% of revenue. A similar growth rate in the overall business revenue, will lead to a 10 % growth in the topline. This will lead to a very significant pass through to the bottom line. That is the essential difference. In one case you are expanding the whole pie, while in the other its just one small slice being improved, while the pie does not expand, infact sometimes contracts.

Nowadays it seems to be a habit though. Most MNCs seem to be restructuring all the time. This is really a code word to control costs and become more efficient. A continuous cost drive takes the edge off creativity and makes people risk averse. Employees are incessantly worried about their jobs, so very little space is left to actually worry about performance. There are other side issues. Uncertainty, while cost is saved, leads to tension and insecurity. This inevitably leads to politics and a lot of in-fighting. The employees forget the purpose of working for the betterment of the company. Very soon, even when the cost has been saved, the company has lost enough sales, so that we are back to square one. The same bottomline! So then this process is applied again and more costs are drawn out of the system, with the same circular reference effect on the sales. The company is actually chasing its tail and we have seen some large companies dwindle into nothing over time.

Gunning for growth is always a positive message. It means more sales, more people working, less per capita costs, greater buoyancy, more people progressing in their careers and general all round happiness. Of course it comes with more risks, as growth is not a given and many times one has to create this growth, sometimes with innovation and change, other times with out of the box thinking.

Fortunately, in almost all my career, I have been in growth situations and only a couple of times has one encountered a cost saving situation. I make no bones about it…once the job was done, my dislike for the organisation led me to leave it at the first available opportunity, as part of a general exodus of many good people. Infact, generally the best performing people find optimistic spaces and are much happier moving from these sort of adverse cost saving situations.

The need to cut costs will surface at times, especially when a business is in trouble, and to save the company and a larger part of the work force, some sacrifices have to be made. In this case cutting cost makes sense for survival sake. But not the way its practised today, for the sake of enhancing bottomline and rewarding shareholders at the cost of employees lives and families. That is a most inhuman form of management. At the same time one is not advocating rampant cost increases here. Its good to be cost conscious and not throw away efficiency. However, that is a mind-set and not the main purpose of the business, which is to sell profitably, make bottom-line, have an engaged work force and happy shareholders. A balanced path!

The picture is from the free picture site dreamstime.com

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About sarfarazar
I have been lucky! A long career with large scale organisations and some acclaim. Also, took time off to write, mentor and do some education and social development projects. I continue to mentor and help younger people in life. Inshallah, hope to write on various subjects in my blog.

20 Responses to The urge to cut costs

  1. Shaista says:

    Interesting read! I am not very good with numbers, but i find the whole cost cutting concept rather claustrophobic. I agree that it needs to be implemented when the company needs to survive, but it certainly does not make sense when the vision is to grow. Wo urdu ki kahawat hay na, ‘jitna gurr dalo gay utna meetha niklay ga’, kind of using the ethos of this proverb…you need to invest in your people, in what it takes to grow…unhappy employees equals shoddy performance and i think inevitably the organisation gets to a point where they have no choice but to cut costs, this time not for growth but for survival.

  2. K. Balkhi says:

    So cleanly laid out: your crisp pen made these oft-nebulous concepts feel like common sense – yet apparently uncommon practice… Great image to match too! And, of course, am most excited to see ‘sustainability’ in there!

  3. Mumtaz Siddiqui says:

    SAR, wonderful article ! As a marketing man, it has always been my dream to have a finance person incharge with such a vision. Rare to find 🙂

    • sarfarazar says:

      Not really a finance guy…lost that a long time ago…infact personality types are more the question here. There will be some who will be conservative,others more Risk taking. That Is probably what defines actions more.

  4. Azhar says:

    Sir
    It’s very lovly article.. It’s the voice of today employee from each n every company
    No cost cutting from employees benefits is a normal culture in almost every organisation in pakistan
    I really thankful to you as you are doing very well by raising a sort of balance culture
    Thanks

  5. ali osama ashraf says:

    Nice read 🙂 made me happy

  6. arshadanis says:

    My experience says that some companies incur costs that do not contribute to business growth and development in any way, such wasteful expenditure must be weeded out. Further there is a difference between cost cutting and right sizing. Normally right sizing is taken to be an exercise in cost cutting and generally connotes down sizing, it may not be so in all instances. Structurally an organisation must be capable of meeting all challenges and each individual must have a unique role to play with a sense of pride and purpose. Any organisation so structured can only cut cost at its own peril and can not escape its harmful consequences in the long term.

  7. Indeed cost cutting is a short-term measure, not a strategy that would help sustain businesses in the longer run.

  8. yamnahassan says:

    What a co-incidence! I was reading an article over WARC only yesterday which talked about brand sustainability through CSR. It was by an Indian author and I was a little surprised about how she had quoted Engro’s example about setting up a small community in Daharki with world class facilities and other amenities like schools, colleges to ingrain loyalty in the employees, which definitely led to long term commitment in them. I felt so proud 🙂 Indian authors seldom tend to talk positively about Paki companies, our companies are barely ever mentioned.. 😦 and today, i logged in to wordpress after ages to read this article by you on a similar note. 🙂

    You should totally write for international journals as well.

  9. Sohaib Alvi says:

    Like everything in life and in management balance is the key. I agree with arshadanis here and would like to add that some companies are wrecked because of a needlessly high ratio of overhead expenses in relation to revenue. But I also agree it is a short term measure to bring the company on track; rest is all about going for growth and looking to expand into new sectors. Easier said than done but it happens doesn’t it?

  10. Mumraiz Ahmed says:

    I am 100 % agree with your statements written in the article. Actually its hope that lift the entire organization towards success. Growth Model and plans always give hope to employees and customers also, that becomes the cause of better sales and huge profits.

  11. Sajid Aziz says:

    Good inside views how to keep balance in “cost saving and employees saving” i also written same concerns in my LinkedIn article LAY OFF PLAN is necessary for Companies survival?

  12. Syed Hassan Imam says:

    Sir, I will second you that focus should be more on growth models rather than cost cutting solutions. During my total professional career of 23 years I have gone through may cost cutting drives, accusations, mergers and J.Vs. What I have learnt is; cost cutting has never prove to be very effective in the long run. Rather it has created an environment of frustration among the employees. They become panic, the good staff leaves the boat and company is left with staff with low productivity. Few of the key reasons are;
    1) In majority of the times, the cost cutting drives and their key objectives are not properly communicated down the line. As a result a wide communication gap is experienced between the top and the middle management.
    2) Most of the time the companies they expect drastic change in profitability through cost cutting and that actually never happens. As most of the time you are ignoring the efficiency related with the cost drive, more focus remain’s on the bottom line.
    3) Usually no time frame of cost effective drives is communicated down the line and once its there, its for every (specially in the majority local organizations regardless to size) resulting in a tense environment with in the organization.
    In short to yield better results from cost drives clear cut objectives and time frame should be communicated down the line. It should be used for bringing efficiency in the system for shorter period of time and should not be considered as a big tool for improving profitability….. I have never witnessed any company becoming profitable on sustainable basis based on its cost cutting drives.

  13. Javaid Ahmed says:

    I think there is a misunderstand here about costs. Cost leadership is a potent route to a competitive advantage … it is about innovation in processes that leads to a cost advantage. Cost reduction that subtracts value, as embedded in the above discourse is hardly recommended as a route to a competitive advantage. I think this issue need a half day lunch seminar to clarify the concept.

  14. Munzim Vahidy says:

    An interesting read.
    More often than not,head count is reduced in the backdrop of cost cutting measures,as a sequel to the set back due to Managemment Gaps in designing a win win solution in a given business scenario.
    Regards

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