Cutting Costs Makes You Want to Scream?

Sure. Because You’re Doing It Wrong

By Walter Simson

These days, the smart advisors are telling clients to cut costs.

And I guarantee you that if you were to put the smartest team into a room and ask for cost-cutting suggestions, they’ll come up with insignificant, “end team gatherings” kind of ideas. These are trivial expenses that won’t change the company’s underlying profitability. Part of this is because no business intentionally lives with excess expenses. If you can easily see the excess, you can cut. And no P&L has a category of “Excess Expense.” So, it’s hard to see. Also, truth be told, many expenses have a power overlay on them. When you hear, “Mister Jeeves says we need the cheese service for Mister Wooster,” you think, "Who am I to challenge Jeeves?"

And I find that the most common, board-mandated strategy--surveying your vendors for best price--gives limited benefit. The guy may quote you a slightly better price for a different grade of widget, but then the widget-specifiers in your own company complain that they can’t work with the new item. That means the negotiation over cost can be as much internal as external.

The secret is to know where to look beyond the expense category, into operations. Here are some very effective, but not necessarily easy, tips on attacking the debit side of profitability:

1.??????? Look For the Incomplete. A very tough assignment that requires you sharpen your perception. But face it: we all have stuff that’s been left undone. Incomplete systems projects, half-finished marketing initiatives, not-quite integrated merger partners. The trouble with incomplete stuff is that as we suffer along with the unfinished, we end up spending money on two things, not just one. A company I know off-loads its truck maintenance duties but keeps a fully stocked garage and a part-time mechanic “just in case.” The requirement? It’s for closure.

2.??????? To Err is Common. We often start a project, expect results that don’t materialize…and then let it hang on. This is related to the sunk cost fallacy, which is a psychological issue that prevents us from letting go. The tip? Decide that something isn’t working. For example, a Midwest manufacturer started a satellite sales office in Texas. The new rep managed some Midwest accounts but didn’t make much of a sales impact with Texas buyers. It would have been easy to keep the office open as a sign of hope. And the entrepreneur was tempted to see the effort as a failure. I urged that, instead, she see the effort as a limited-duration experiment from which we learned a good lesson. That bit about deciding that something isn’t working? That’s the hard part.

3.??????? Be Excellent...And Streamline Company Habits. Aristotle said that excellence is a habit. We must set up company habits (otherwise known as procedures) to ensure that we get the results we want in the day-to-day. I see this a lot in company order-entry processes, for example. The sales manager may have assumed that a new customer service rep can learn the job from the person in the next cubicle. And that causes the very expensive result of poor job planning, incomplete order information, and late orders. Creating a tight order-entry process is absolutely no fun for most entrepreneurs to do themselves. But you reduce errors, and costs, when you can absolutely define how a customer order is entered, with what information, and by whom. Incomplete procedures lead to mistakes, and mistakes are costly.

Each of these examples provide vast opportunities for cost reduction--which you won’t find by scanning the expense section of the P&L. This is what you might call deep work. Go beyond the financial statement, and dig in to how the company operates. And guess what? Your colleagues will appreciate the clarity that results, which makes this a doubly rewarding assignment.