Recent years have seen businesses take significant financial hits. Many did not survive the initial COVID period, and some of those that did had to make substantial cuts in spending. Over this period, I saw many leaders go about cost-cutting incorrectly. Some of their changes worked for a short while but gave way to problems further down the road.
When analysing spending and finding places to cut company costs, leaders often make the following mistakes that can end up costing the business more in the long run:
Setting unrealistic targets
Too many leaders make big cuts to reach unrealistic goals when searching for places to reduce company costs. It is tempting to make up for lost revenue by setting aggressive targets. However, this often creates more disaster than success. If you strip departments of the funds they need, you might impact their operations and productivity, making it difficult for them to perform.
Instead of focusing on cost cuts, you need to focus on cost optimisation. Set realistic goals, even if they are not the best-case scenario. Focus on achievable goals that will still allow your business to thrive.
So, how do you mark what is realistic and build your plan around that?
Analyse the current state of your operations. Take note of your spending and look for opportunities to cut costs without compromising operations. You might have to negotiate in some areas if there is already very little to remove.
Consider how reducing your costs might impact your customers. You must be careful that any costs cut do not adversely impact the products and services delivered to your customers. Find ways to optimise costs, so you save while maintaining your service levels.
Look at past responses to cost reductions and avoid making cuts in areas that suffered greatly. Be mindful of responses from your team. If many people responded negatively to a particular cut, you need to optimise rather than cut costs there.
Considering these factors, you can create realistic cost-reduction goals and avoid setting unrealistic targets.
Making harmful cuts to the business
When you set unrealistic targets, you could cause more harm than good to the business.
Budget cuts to talent can harm your business. People want to work for companies where they have the opportunity to gain a raise. At the very least, they want to work with the assuredness that they have a stable income and stable hours. If you need to cut costs, you must be careful about cutting your investments in talent. You could end up increasing churn or causing a mindset where people do not feel confident in the business. Moreover, if you take away too much budget from your talent sourcing initiatives, it may become more difficult for the organisation to account for churn.
Cyber security is another area where reducing funds can put your business at great risk. A ransomware attack or data breach is enough to damage your reputation, let alone the cost of recovering your data and losing customers. You could see adverse and costly consequences if you cut IT costs without accounting for your cyber security initiatives.
Stifling much-needed innovation
Too often, leaders make the mistake of cutting costs to meet short-term needs rather than planning to meet long-term goals.
You need to protect investments in innovation. You may have to rethink budget allocations across different departments and functions. When you stifle innovation, you stifle the business’ ability to grow and gain an advantage over your competitors.
Innovation is essential for organisational growth. Therefore, you must encourage innovation within the organisation by balancing cost cuts with providing resources and support to those working on new projects. Doing so ensures your organisation continues to grow and thrive.
Creating too much complexity
Complexity is the number of different elements that interact with each other. The more elements there are, the more complex your organisation. Many factors can contribute to complexity, such as the number of employees, the number of departments, and the company’s size. Your organisation’s structure and processes can also introduce complexity.
Complexity is often what causes your costs to rise in the first place. When you make things too complex, you slow down operations.
Many times, when leaders try to save money, they make things more complicated instead of simpler, leading to more problems and increasing costs in the long run. Therefore, keeping things as simple as possible when trimming your budget is important.
Complexity might save you some direct costs in the long run, but it can also generate indirect costs, such as too much time spent on decision-making, gaining approvals or simply moving a project onto the next step.
Failing to prioritise digital transformation
Business leaders who make cuts to their budgets without considering digital transformation may find themselves at a disadvantage in the years to come.
Digital transformation leverages technology to create new or improved business processes, products, and services. It integrates digital technology into all areas of an organisation to radically improve performance. Digital transformation is essential to business today. Without it, you will struggle to enhance customer and employee experiences, efficiency, and your bottom line.
When making budget cuts, you should look for areas where you can save money without compromising on digital transformation.
Resonate can guide you in optimising company costs
Do you need to cut and optimise costs in your business? How confident are you in your cost-cutting strategy?
I help B2B business leaders define or refine their strategies. I provide strategic advice and consulting on various facets of strategy; business strategy, corporate strategy, product/service strategy, functional strategy, go-to-market, competitive strategy, pricing strategy, etc.
My aim is to work with business leaders to help them make sound business decisions. I find more often than not, that the issues businesses face are caused by strategic issues.
If you are starting a new role as a business leader, or you have been with the business for a while, and you are initiating new transformation projects, let’s connect, let’s talk. I have extensive experience in guiding business leaders on transformation and change projects. I look forward to hearing from you.
