How Can Managers Cut Costs?

Regardless of whether the economic environment is booming, business managers must control costs. Boards and shareholders will ask corporate managers to continuously cut unnecessary expenses so as to put the resources saved into the most rewarding business. Their demands are not difficult to achieve - even for enterprises with high profit levels, there is often room for significant cost reduction. However, faced with complex business and changing market environment, it is extremely challenging to properly control cost.

When enterprises cut costs, they should not discriminate against all kinds of expenses. If business managers are indiscriminate, cutting every seemingly unnecessary expenditure is likely to weaken sales competitiveness and affect sales. On the contrary, managers should control costs from the perspective of enterprise strategy and avoid damaging the core of those decisions. value Elements.

　　 cost Four traps in the reduction

Many senior enterprises Administration All of us are confident that we can easily find out the "fat" that exists in the operation cost of an enterprise. However, cutting costs entirely by subjective intuition is a risky gamble. Even the most experienced cost control experts are the same. Managers are most likely to erroneously cut down seemingly unnecessary but important expenses, resulting in enterprises facing more serious problems in competition.

The first trap -- quick success and instant benefit: refers to short-term actions taken by business managers to cater for the needs of recent performance indicators, such as quarterly or annual reports. To make investors satisfied, CEOs and CFO will ask department managers to cut costs to achieve profit targets. Although this can really reduce costs in the short term, it can not be sustained. The cuts usually resume in the following year.

It is not difficult for an enterprise to cut a certain expenditure in a relatively short period of time without affecting its operation. Therefore, expenses like marketing, maintenance and personnel training will always be the victims. However, if enterprises fail to find effective alternative measures for these reduced resources, their long-term business performance will be affected. As a result, in order to recover the lost resources, enterprises will inevitably recover their expenditure to the previous level. If luck is good, then the lack of resources in the process of recovery, may not cause substantial damage to enterprises. On the contrary, this short-term cost reduction behavior can quickly destroy the brand image, damage the consumption experience, and lead to other irreparable consequences - all of which will ultimately damage the value of the enterprise.

The second kind of trap -- stick to stereotypes: refuse to change is human nature, no one likes to change, especially those huge projects, there are risks, need a longer time or need to invest a lot of changes before the realization of revenue. In fact, many employees are accustomed to sticking to stereotypes and sticking to their inherent inefficient and highly consumed workflow. They can even convince themselves (and anyone else) that the current workflow is the only viable option. They believe that any change in the workflow will have disastrous consequences. These tactics often succeed in persuading business managers to cut costs elsewhere.

For example, the chief operating officer of a retail chain store insists that the audit of the store should be conducted every month, which he thinks can control inventory theft. After studying the operation of this chain store, I put forward a cost control plan that can save millions of dollars: extending the audit period from 30 days to 90 days, and increasing the audit frequency for the most expensive stores. However, in the end, the COO did not accept the proposal. This example shows that many managers instinctively choose not to make or do little change, and result in giving up obvious opportunities at hand.

The third trap is to imitate other businesses blindly. Admittedly, business managers can better understand how to improve efficiency by comparing themselves with other enterprises in terms of procurement, production and distribution. However, the cost of a certain link is higher than that of other enterprises, which does not necessarily mean reducing costs or changing processes. In many cases, blind cost cutting will affect consumer experience and damage shareholder value.

A fast food chain is a good example. Comparative studies show that the cost of labor for the store business is higher than that of peers, partly because the company has invested more manpower in sending orders. Accordingly, the initial cost control plan of the enterprise includes the human input to reduce customer service. However, a more in-depth study shows that about 60% of the business revenue of the company comes from outgoing orders, and the speed and accuracy of service is one of the most important criteria for such customers to choose fast food restaurants. Better service speed and accuracy than peers is the competitive advantage of the fast food company. If managers reduce the number of people who drive outside the service, resulting in a decline in service speed and quality, their competitive advantage will be greatly reduced. In the end, managers made the right decisions and did not cut back on this investment. Therefore, it is important to know where the higher cost is, but it is also important to understand how cost investment affects enterprise value.

The fourth trap is narrow view. Sometimes, managers are too concerned about their own business areas without considering how to cooperate with other departments or brands to reduce repeated inputs. Some businesses may contain some areas which managers do not know much about, which makes them even dare not to taste it. For example, we have met many enterprises and prefer to take other detours rather than make substantial improvements to the IT system, such as the launching of a new enterprise resource management platform (ERP) or the upgrading of sales terminal management system (POS).

Methodology of cost control

If we want to find and reduce tens of millions of unnecessary expenses without damaging the competitive advantage of enterprises, we need to adopt a strategic approach. This ensures that we are based on rigorous facts rather than mere feelings or intuition. This method avoids entrepreneurs' attention only to those superficial and easy short-term gains. Instead, it carefully analyzes the impact of cost reduction on enterprise strategy, and protects and strengthens those elements that determine the core value of an enterprise.

The feasible methodology will start with (4) 1 steps: (1) do cost diagnosis and find out research priorities; (2) analyze in depth, identify opportunities to reduce costs; (3) find solutions; (4) choose the best ones.

The first step is to diagnose costs and grasp the key and key points.

A large collection of factual data on costs is used as a basis for suppressing the emphasis of subsequent assessment. To do this well, managers need to have a clear understanding of the organization and cost structure of enterprises. Although internal financial statements are the basis for analysis, these statements do not necessarily reflect the cost situation of enterprises. In many cases, we need to subdivide and reclassify the costs. In particular, when the total cost has not been allocated to the various business departments, it is only assessed arbitrarily or according to the outdated financial criteria, or is paid according to the unreasonable internal price of the enterprise. For example, a retailer with multiple chain stores may allocate the cost of real estate development according to the sales volume or store number of each chain store brand. If a chain brand of the company has a large cost due to rapid expansion, relocation or decoration, and when the chain brand is similar to other brands, the apportionment method can not reflect the true source of the increase in cost. It is more difficult to apportion the cost of warehousing and distribution.

In some cases, the total cost of an enterprise is never allocated to business activities. If IT, personnel and financial expenses are not allocated to the corresponding departments or projects, these costs may be inflated like balloons. If we want to share the cost reasonably, we must use indicators that reflect the purposes of expenditure more accurately and categorize them. For example, the number of full-time employees (FTE) may be an appropriate indicator for apportionment of certain human costs, and the number of internal maintenance requests may be more suitable for measuring IT costs. In other cases, sales volume, sales volume, business area, operating profit or number of stores may be better reference indicators. {page_break}

Managers should not only know the current cost structure of enterprises, but also understand the trend of cost changes. Only by grasping this trend can we identify more accurately the most expensive and fastest growing business units. Enterprises must also analyze costs from different angles - by sector, by function, or by geography (for example, group headquarters, factories and stores).

In further analysis, it is also necessary to convert the general trend of cost change into specific indicators for standardized assessment (such as unit store or unit customer cost, percentage of sales or profit, etc.). If you look at the total amount, some costs may not seem to grow fast. But if the number of stores in a chain store is decreasing, the total cost of a slight increase may obscure the fact that the operating cost of the unit store has risen sharply. Many clients of AI Kai consulting are surprised at the results of the analysis. Some of the departments that are considered best performing may not be as good as they think they can be; in some areas where some customers are unaware, the cost may be very substantial and growing rapidly.

By studying and analyzing the "operating leverage" of enterprises, business managers can better understand the opportunity of cost reduction. When the enterprise gets a greater marginal profit when increasing a cost investment, this investment will achieve operational leverage. It is very important to identify the existence of operational leverage to dig out unnecessary costs. Indeed, sometimes management's investment in some sectors will also be negative before the harvest comes. The key is how much returns managers can bring to their own expenses. It is expected that they will act decisively if they fail to achieve the expected return. The analysis of the cost structure of enterprises should be based on two perspectives: historical experience and future trend (based on enterprise strategic planning and related financial forecast), so as to know if there is any operational leverage and when to achieve it. Managers should ensure that mature businesses can bring greater leverage returns, thus ensuring that investments in growing businesses or functions can create value for shareholders in the future. At the same time, the current negative leverage business should also generate positive returns in the future.

It is worth noting that the first phase of the study does not seek to completely discover all the unnecessary costs and to make every effort to cut costs. It takes a lot of time and tends to lose direction. Managers should make some reasonable assumptions about the most likely cost reduction projects, so that the next step in finding opportunities for cost reduction will be more in-depth and targeted.

The second step: identify opportunities to reduce costs.

Once management has reached agreement on the key research direction of cost reduction, it can begin to analyze thoroughly. A thorough understanding of the relationship between cost driving and value creation is very important. What are the factors driving cost changes? What value do they create? For example, the raw material costs of a restaurant chain are affected by sales volume, product sales structure, procurement contracts, and the quality of food and beverage sold. Correspondingly, these factors also affect the pricing strategy and overall food quality, thus directly affecting the customer's brand experience and consumption choice. Obviously, cost reduction must consider the impact on customer brand experience and consumer choice. In other cost items, the amount of labor and the complexity of processes may be more important cost drivers. To find the right solution, managers should list all these factors and find out the relationship between cost driving and value creation through the model.

On this basis, managers can choose some indicators for comparative study to find out the opportunity of cost gap and improvement. Different research projects can achieve different research purposes. The targets that can be referred to can be competitors, and other sectors or regions within the enterprise can also be the performance of last year. Specific reference indicators vary widely: such as the best operation process, organizational structure or cost burden.

Obviously, it is not easy to choose reference standard correctly. Choosing too many peers as reference targets will make the data span large and poor correlation, because the reference enterprises and the target enterprises may have essential differences in business; too few samples may lead to research bias, or because the samples are too limited to produce valuable conclusions. Comparative research is indeed very effective, but incorrect use will lead to erroneous conclusions.

It is very difficult and time-consuming to conduct comparative research correctly, which requires more selective research. The core of the comparative study is to find accurate information through contact with competitors, and then combine the information of first-hand investigation with second-hand information. It is a scientific and artistic work to transform the data of comparative research into useful information, which requires analysts to have strong financial modeling, hypothesis testing and data understanding.

With internal and external data, management can determine which links to cut costs. The results of this phase analysis will be a series of reduced cost items and their corresponding financial impact.

The third step: establish solutions.

At this stage, managers often find that costs can be reduced in many links, so we should begin to consider how to reduce the costs in these links. For example, in order to reduce the increasing training costs of all branches of the world, electronic courses can be considered. For example, outsourcing functions supported by IT can be achieved in order to reduce costs, improve service quality and staff efficiency. The generation of these plans is based on the first two stages of research, and can be formulated by internal discussions or from outside.

For every link that can cut costs, managers should make clear how to cut them. Moreover, they need to specify how to make changes in business so as to ensure that the process of cost control does not harm the interests of customers and shareholders. For example, managers should not only identify which expenses can be cut, but also understand what resources should be retained to ensure that the original performance does not decline. Of course, not all the options listed will be implemented.

The fourth step: choose the best plan.

Not all cost reduction programs are equally important, and some cost issues may be even more prominent. In the last stage, managers should optimize these plans according to their importance.

Cost cutting is sometimes very complicated. In retrospect, we mentioned the case of cutting down the cost of raw materials by catering chain enterprises. The benefits of some improvements are obvious: if we reduce the number of upstream suppliers, we can increase the scale of procurement so as to get a contract for the procurement of food and beverage that is more beneficial to the enterprises. In practice, managers need more information to make decision analysis, such as referring to consumer surveys or the results of pilot studies. Project optimization is a complex process, and a series of indicators need to be used to evaluate each cost reduction plan.

The above analysis framework not only quantifies the cost that can be cut, but also pushes managers to consider other important qualitative and quantitative factors, especially the impact of cost cutting on value creation. In addition, managers must consider the resources and changing business and processes that need extra input after cutting costs, otherwise they will not be able to judge the merits of the plan. This is essential for ensuring long-term cost savings.

After evaluating the alternatives according to the above indicators, we can sort out the alternatives comprehensively. Naturally, managers often have different views on the weight of each factor. Therefore, there is no universal ranking formula. The preferred plan should be a healthy process of repeated discussion.

Some programmes are effective and effective, and such programmes should be implemented immediately. This will provide power and financial support for other cost reduction programmes.

Cost cutting is an effective way to create shareholder value. Therefore, enterprises should regard cost control as a long-term rather than a phased task. If managers blindly cut the seemingly unnecessary cost, they may damage brand interests and weaken the competitiveness of enterprises. Therefore, we should treat cost reduction prudently.

To properly cut costs and create lasting value, we must first avoid some common pitfalls. By adopting the correct methodology, managers can distinguish the different effects of expenditure on value creation, and can more effectively reduce costs and control risks. The use of proven standards to assess cost cutting programmes is more conducive to management consensus, so that the cost reduction plan can be implemented smoothly.

Whether our aim is to increase operating profit to create value or to provide funds for strategic development, cost reduction is an effective means that can not be ignored.