Cutting cost is not a strategy but a reaction to one that failed

As more and more companies declare profit warnings and significantly worse results, cost containment is all the rage again. You will hear a lot more in 2017 about reorganisations and rightsizing; efficiency and leanness. These will become the prevailing buzzwords in boardrooms.

I always wonder: If you want to become the ‘right’ size now, which size were you before, and why? And if ‘lean’ is your credo now, what was it last year? If ‘efficient’ is your newfound adjective, why did you think having an inefficient business was okay in the recent past?

I have written many times before: Cutting costs is not a strategy; it is a necessary reaction to a strategy that has failed. You are forced to do it because you read the market wrong, or because your competitive advantage proved to be weak.

It is medicine you take to cure an illness. You administer the bitter treatment and move on quickly, hoping you can get back to growth and ambition.

Many corporations facing constrained revenues react with a ritual jerking of the knee, cutting costs every which way. If that’s you, please be very, very careful. Cost containment saps morale, and sending people home demoralises everyone, including those who stay.

It creates an air of defeatism. Most dangerously, firms slash costs in the wrong places: They degrade the customer experience by reducing service standards and by diminishing product quality.

So if you are caught up in a cost-containment exercise, here is a quick guide to doing it properly.

Most importantly: Don’t think about costs before you have thought about strategy. What is your game-plan to win in the future? Is it still valid? Is your strategic identity clear? Do you still have sources of competitive advantage that will serve you well?

If you’re going to trim, first trim your strategy. Remove all the superfluous initiatives that you allowed to take root in your glory days. Focus on the necessary — those few capabilities with which you truly outdo competitors, and which will allow you to get back to winning ways.

Once you have identified these capabilities, do not do anything to harm them. This is not where your cost-cutting should happen. Cut costs where they do not harm your future.

A useful new book by the folks at PwC, Fit For Growth, asks us to consider the cautionary tale of the once high-flying US electronics retail giant, Circuit City, which disappeared in a matter of months in 2009.

The chain had grown to 700 locations and 60,000 employees at its peak, using the warm relationship shop-floor employees had with customers, patiently advising them on big-ticket purchases. They hand-sold expensive and complicated home entertainment systems and appliances, and delivered a unique customer experience.

The authors tell us that when more savvy competitors like Amazon and Best Buy started taking business away from Circuit City, its bosses started cutting exactly the wrong costs.

REACT HAPHAZARDLY

The company reacted haphazardly. It shut down product lines suddenly. It cancelled projects that would have remodelled its stores to make them more welcoming and customer-friendly. And in 2003, it summarily fired thousands of its most experienced staff members and agents, replacing them with cheap hourly employees.

A death-spiral set in: morale plummeted, customers started staying away, inventory sat unsold, suppliers refused to supply, investors fled the stock. The recession caused by the 2008 global credit crunch led to the final rites. Circuit City closed its doors in March 2009.

This was panicked cost-cutting writ large, and it caused the fall of a giant. Would the death have happened anyway? Not necessarily. Circuit City still had plenty to play for. It just needed to reaffirm its sources of strength and rebuild around them.

It needed to focus on what really mattered. It needed to refresh the old advantage for existing customers, and build a new digital advantage for migrating customers. It did neither.

Is your organisation facing a similarly disturbing scenario? Are customers migrating to quicker, cheaper, better alternatives? Has regulatory change put your senior team in a tizzy? Is a slowing economy causing grim boardroom meetings? Is digital disruption a dark cloud on the horizon?

If that’s you, don’t reach for that crude axe. Reach for your strategy. Refresh and reset it, and focus it on the future, not on a past. Then get to work on the right costs, using a fine scalpel, letting wisdom and compassion guide your hand.

www.sunwords.com