Why cost cutting is not the answer for businesses looking to come back stronger

| July 14, 2021

Organisations looking to recover strongly from disruption are often tempted to slash costs as a first measure. This can be seen as a useful interim approach to get the business back onto a stable footing, before decision-makers determine the organisation’s next steps. However, becoming battle-ready post-COVID-19 requires companies to take a more strategic approach that looks beyond simple cost cutting towards proactive ways to position the business for success, according to Konica Minolta.

Dean Hosking, general manager, Konica Minolta said it’s easy to understand why so many companies default to cost-cutting as a way to cope with disrupted revenue streams and lower cash flow due to the pandemic.

“Businesses may be risk averse in the current climate and may be looking to minimise outgoings to lower risk. The truth is that this is more likely to cause more problems than it solves and it doesn’t position the organisation for a strong comeback unless the business was spending profligately before the pandemic. Instead, organisations should take a strategic look at expenditure and see where changes can be made to deliver a stronger return on investment and manage costs for growth.”

Konica Minolta has identified four common mistakes businesses make when looking to cut costs indiscriminately:

1. Setting unrealistic targets

Often a cost-cutting initiative is as simple as ‘reduce expenditure by 10 per cent across all lines of spending’. However, this may not be realistic or productive in the long term. Setting unrealistic targets may look good on paper, however failing to achieve them is only likely to disrupt the organisation and, potentially, damage morale.

Tim Greenhill, senior consultant, Impact Management, said, “Cutting costs across the whole business might see the organisation reduce its headcount and its investment in marketing, for example; two of the most essential tools to get the company back up to full speed. Rather than cutting costs indiscriminately across all areas of expenditure, organisations may be able to make significant cuts in some areas without affecting the company’s performance or ability to compete. That’s where the savings should be focused.”

2. Failing to sustain behavioural changes

If an organisation cuts costs in an area that can’t sustain these cuts, then the spending is likely to creep up again over time regardless. This means margins and growth will be eroded as time goes by. Going on a ‘cash diet’ may seem realistic when times are tough but, as the business looks to build, it’s unlikely to be able to sustain these cuts.

Tim Greenhill said, “Looking at cost optimisations that can be sustained over the long term and that add real value to the business is much more likely to yield real success. Again, this means decision-makers need to avoid knee-jerk, reactionary cost-cutting decisions and look deeply into the business to see where it really makes sense to tighten up spending not just in the next few months but over the next few years.”

3. Slowing down the organisation

Cost cuts inevitably mean that the organisation can’t expand in certain directions or follow through on business plans. In some cases, it may be necessary to put expansion on hold or consolidate instead of adding new products or services. However, organisations that fail to invest in the right areas can find their growth dramatically slowed down.

Tim Greenhill said, “Winning companies tend to focus on fewer products and services. They look to amplify the best-performing products and services by investing in the ability to scale these areas. This might mean investing in research and development, adding more staff members, or purchasing new equipment. Companies that overlook these opportunities will miss an important opportunity to get ahead.”

4. Choking off innovation

Growth requires investment. Being too conservative and failing to invest in growth areas can choke off the innovation that’s required to take businesses forward.

Tim Greenhill said, “It may sound counterintuitive yet now is the time for bold bets, as long as they’re underpinned by strategic planning and sound data. Leveraging every opportunity for growth is going to require investment. Taking a measured approach to cost cutting can help organisations identify the right areas to make savings so they can redistribute funds to the areas that will pay off.

“Organisations shouldn’t be looking to just cut costs for its own sake; instead, they should be looking at how to allocate money where it will deliver the strongest return on investment. Those that can do that well will be best-placed for growth in the post-pandemic environment.”