How to reduce operating costs: Strategic Playbook

?? One of my principles? Make it better, not bigger.

As a CEO and Tech Consultant, I’m constantly seeking ways to enhance efficiency without sacrificing quality. It’s not an article about “cancel all your subscriptions” or “use only free tools”. I’ll try to share more practical tips.??

Over the past 5 years, I’ve provided consulting to numerous startups and SMEs in this situation – professional-services firms, high-tech start-ups, and financial firms. My experience shows that 80% of cost-reduction opportunities follow similar patterns.?

? Let me say right away – forget about finding a single idea that would radically change the cost structure of your organization or department. Instead, try to achieve your goal with a combination of various scenarios.

To begin with: What are operating costs?

Operating costs are the expenses vital to run your day-to-day business activities – rent, employee salaries, utilities, software tools, etc.?

?? Operating costs = Cost of goods sold (COGS) + Operating expenses (OPEX)

But how do we keep these costs in check without sacrificing quality or efficiency? Let's break down? the ways to reduce operating costs into 3 actionable strategies.

Strategy #1: Cost Cutting – Stop the Bleeding

This strategy works perfectly to quickly save funds, that’s why it’s basically why I like calling it “Stop the Bleeding”. This approach involves finding and cutting unnecessary expenses, aiming to reduce each budget item by 5% to 10% within three months. What else to mind here??

Flexing Staffing?

The choice to hire full-time workers versus contractors can affect costs significantly, especially if your operations revolve between busy and slow periods. By hiring contractors during peak periods and downsizing during slow seasons, you can significantly reduce labor costs without compromising productivity. Scale up quickly without incurring long-term commitments.?

Outsourcing Services

Along with flexible staffing, let’s talk about outsourcing some business operations. For many entrepreneurs, running many tasks in-house is a distraction from their core goals.?

Outsourcing non-core functions (ex. customer support, data entry) to specialized service providers can be more cost-effective than handling it all in-house.

While it might seem like hiring an outside vendor would cost more than doing it yourself, is not true. Qualified service providers generate better results and stick to fixed KPIs.?

Move from on-premises data centers to the cloud

Running and managing servers, storage, and networking gear can be costly. On-site setups usually end up being more expensive than using cloud services. These expenses not only cover setup but also ongoing upkeep.

Supplier Contract Negotiation

Negotiating contracts with suppliers can yield substantial savings. By using volume discounts, renegotiating terms, or seeking alternative vendors, businesses can trim procurement costs and enhance their bottom line. By renegotiating supplier contracts and consolidating vendors, we were able to achieve a 15% reduction in procurement costs within the first quarter.

Also, paying your bills early can save you money (yes, we need to reduce costs, not generate new ones, but wait!). Vendors often give discounts if you pay before the due date. Even a discount of 2-3% per bill can accumulate into significant savings over time.

Cancel Unused Services

Still think it is a no-brainer? Unused subscriptions and services can silently drain resources from your bank accounts. It’s easy to lose track of unused services, especially if you’ve set them up for recurring payments via auto-pay on your credit card. Auditing small recurring costs quarterly.?

Also, a subscription service just isn’t as useful as we thought it would be. Companies make millions of dollars a year with software-as-a-service apps that companies sign up for, but never get around to using.?

Also, you can share assets or tools across departments to save on unnecessary seats in SaaS you use.

So keep an eye!?

Strategy #2: Cost Optimization – Establish Parity

This is a tactical approach that focuses on cost optimization to reduce the cost of existing resources. For example, you can use software to automate expensive business processes such as onboarding new employees or clients.

Basic Automations

Streamline repetitive tasks and reduce the reliance on manual labor (robots and computer programs can perform work faster than humans, and with fewer errors). Whether it's automating accounting, marketing communications, payroll, bookkeeping and inventory management, production scheduling, or implementing AI-driven customer service chatbots – technology enables businesses to optimize operations and cut down on overheads. By deploying chatbot-based customer self-service solutions, customer support costs can be reduced by 30% while improving response times and satisfaction levels.

Cross-Training Employees

Cross-training employees to handle multiple roles enhances workforce flexibility and reduces the need for specialized hires. By diversifying skill sets within the organization, businesses can minimize recruitment expenses and adapt to changing operational demands more efficiently.?

Compare Different Vendor Bids

If you work with vendors regularly, adopt a competitive bidding system for projects and services? that encourages vendors to offer flexible rates. By soliciting bids from multiple vendors, you can secure cost-effective solutions while maintaining service quality.

Be sure to compile an accurate scope of work or (RFP) for vendors to bid on, as missing information or added complexity can significantly affect the quoted rate.?

Expenses Repurposing

Moving certain expenses to a more cost-effective region or to more efficient channels or departments can help optimize spending. This could involve relocating operations to regions with lower overhead costs or reallocating resources to best-performing departments.?

Eliminate Low-Value Meetings

Audit of all regularly scheduled meetings to figure out which ones can be repurposed, consolidated, or eliminated. Some researches show that up to 20% of the time can be saved on these meetings.?

Strategy #3: Long-Term Value Creation

Drive value in the long term. While it’ll take you money to invest in these new opportunities, those expenses will likely be offset by the gains you see over the next few months or years.

This strategy is great to use when the market is down so you can see wins when coming out of the downturn. It goes beyond using automation to optimize costs and involves rethinking the entire cost basis of your small business.?

Technology Automation

Technology automation is not just the future; it's the present reality driving efficiency and innovation across industries. Did you know that businesses utilizing AI assistants and avatars have reported up to a 40% increase in productivity??

Moreover, personalized ML solutions have shown to boost customer satisfaction by as much as 50%. By using these approaches, you're not just streamlining operations; you're paving the way for growth and success in today's (extremely) competitive landscape.

Custom Tailored Software

Custom tailored software offers businesses a tailored solution that eliminates unnecessary features commonly found in off-the-shelf software, effectively reducing operational expenses. By focusing solely on the functionalities that directly contribute to business objectives, resources are allocated more efficiently, optimizing resource utilization and minimizing unnecessary expenditures.?

Additionally, custom software ensures seamless integration with existing systems and processes, cutting down compatibility issues and reducing both time and costs associated with system integration.?

The scalability of custom solutions allows businesses to adapt and grow without incurring significant additional costs, further contributing to long-term operational savings. As custom software is designed specifically to fit the needs of the business, ongoing maintenance costs are reduced, providing additional savings over time.

New Constant Revenue Streams

Creating a new revenue stream through subscription models can be a game-changer for businesses. By adopting a subscription-based pricing model, companies can offer customers flexible payment options while achieving predictable recurring revenue streams. This approach not only fosters increased customer retention rates but also provides a steady cash flow, offering stability and sustainability to the business.

Androids??

Let's shift our focus from the virtual realm to the tangible world. Androids, or physical robots, are increasingly becoming integral to modern business operations. While investing in androids may initially seem daunting and beyond the reach of every company, starting with just one or two androids can provide valuable insights into the potential cost savings and efficiency gains they offer. While it's true that acquiring androids represents a significant upfront investment, the long-term benefits in terms of increased productivity and reduced labor costs can be substantial. By embracing automation through androids, businesses can optimize their operations, streamline processes, and stay competitive in an ever-evolving market landscape.

King-Level Long-term value

If you have ambitions to revolutionize your industry and gain a competitive edge, it's time to develop your own unique and competitive solution. Invest into totally new cutting-edge technology for yourself. When it’s battletested, start selling your solution!

Don't spread yourself too thin – pinpoint your niche

Diversifying your services can be tempting, but focusing on one or two areas of expertise allows your company to excel. Refine your product or service, ensuring higher quality without spreading resources thin. While this may limit the types of contracts you accept, subcontracting to trusted partners enables you to maintain quality while reducing costs. This strategy allows you to concentrate on what you do best, avoiding unnecessary expenses on training and skill acquisition.

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? Reducing operating costs isn't just about tightening the purse strings – it's about working smarter, not harder. Move beyond defensive cost cutting to a smart cost-saving culture.