Cost-cutting: The secrets of more gain, less pain

As the slowing economy hits home, the pressure to cut costs will be greater than ever. Phil Harkness, vice president of management consultants A.T. Kearney Australia, reveals how to achieve significant and sustainable cost reductions

There are plenty of strategies available for businesses serious about cost reduction and, done well, such strategies need not have a negative impact on a business. Instead, they can help a business to become leaner, more nimble and more competitive.

Overhead reduction: applying process, not panic

There are several components to a company's overheads, and one of the biggest is employee costs. That means when a directive comes to cut budgets, managers often take the path of job cuts. In many cases, this is done hastily and in an ad hoc way, with the result that the volume of work remains the same, but with fewer people to perform it.

The consequences are predictable: a workforce resentful of its increased workload; lower engagement levels; and reduced productivity. In most cases, the costs creep back over time as the reductions are not sustainable.

The other downside of such an approach is that when each department is ordered to scale back its budget  to the same extent, those with a leaner and more efficient team feel the impact more keenly, while those carrying extra 'fat' can afford to lose some of it - thus being rewarded for inefficiency. 

So it is easy to see how such an approach encourages department heads to resist running lean during the good times, so that they can cope with cuts in the tougher times.

The solution is to take a more strategic approach: applying a scalpel rather than a hatchet. By understanding from the bottom up what the work is, what the outputs are and which people deliver them, it is possible to identify where savings can be made sensibly.

Take an analytical view

The first step is to take an analytical view. Break down work processes into their separate activities and analyse the distribution of time, resources and outputs. Then determine who receives these outputs downstream and how they are used.

This process yields detailed data about how every outcome in the company is achieved, and this data can then be used to determine the value or importance of the output and hence where greater efficiencies can be made.

At this point, it becomes much easier to see opportunities for simplifying processes, removing redundant tasks and eliminating the duplications that often exist in large, complex organisations.  

But these insights must then be developed into a detailed, staged implementation plan, which is where the real challenge lies.

A good plan avoids the necessity of a 'Black Friday' lay-off announcement, along with its damaging images of staff walking out clutching their belongings in a box. Such an approach is poisonous for company culture and reputation, and does not generally achieve long-term results. The alternative is a considered, phased approach that reduces the pressure on remaining staff and the trauma experienced by those departing.

Moreover, the savings to be made by this process are significant - up to 20% cost reduction is not uncommon. And, unlike a panic-driven 'slash and burn' approach, the process makes the company genuinely more efficient and able to sustain a smaller cost base over the long term.

More of Phil Harkness' cost-cutting advice will appear in Australian Broker Issue 6.2.