Cost-saving initiatives might seem like a logical solution for businesses under financial pressure yet only 11% of organisations1 manage to sustain their cuts over a three-year period. Not to mention, most companies are happy to pursue cost-reduction strategies, but fewer than half2 achieve their targeted savings in the first year.
These sobering statistics highlight a critical challenge in modern business management: What begins as an attempt to strengthen the business often ends up with sub-par results. Cost-cutting turns damaging when businesses lose sight of their strategic goals.
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Common cost-cutting mistakes that backfire
Quick cost cuts without proper analysis can severely hurt businesses. Research shows that fewer than half (43%) of business leaders2 reach their savings targets in the first year of reducing costs. Only 6% of companies2 consistently put money into growth opportunities without making things too complex.
Making quick decisions without data
During financial hardships, businesses often look to minimise expenses in areas that do not have an immediate impact, for instance:
- Marketing activities like advertising, public relations, and promotional events
- Travelling expenses like business travel, conferences, entertainment, etc.
- Investments in employee training, office equipment, and even technology
- Freeze all hiring activities to reduce payroll expenses
However, companies often cut costs without looking at the data first, which leads to collateral damage. Quick cost cuts also take resources away from important innovation projects and put companies at a disadvantage, such as lower productivity as employees are overloaded with work, lost trust due to lower quality products or services, and unnecessary delays due to outdated systems.
Companies can spot bottlenecks and waste by looking at their workflow data or detailed financial data helps businesses understand which cost centres and spending patterns really need attention.
“Peanut butter spread” cost-cutting
“Peanut butter spread”3 refers to a cost-cutting practice where all departments, cost centres, or projects receive the same percentage reduction. The analogy comes from how peanut butter is spread evenly when making a sandwich.
This may sound like a fair practice, as every team gets the same cuts. However, the action can underline a bigger issue: failing to consider different departments’ priorities and their impacts on the organisation.
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Equal cuts can also discourage high-performing teams and destroy important value sources. The practice may look like leaders are punishing teams that are working well, doubling the existing workload and stress instead of fixing real waste.
In essence, while a uniform percentage cut may appear simple, it often creates more problems than it solves. A more strategic and nuanced approach is essential for effective cost management.
Mass layoffs
Cutting costs through layoffs usually backfires badly, especially when hiring new talents costs twice as much as retaining current staff. Severance payments can hurt company finances; however, it is not the only thing at stake.
Read more:One Critical Task HR Managers Often Overlook: Costs of Bad Hires
Cutting employee costs through layoffs or reduced benefits substantially affects how people feel about their work. Staff cuts also mean losing valuable company knowledge. Companies that downsize lose more than just workers—they lose skills, experience, and know-how that took years to build.
- Experienced staff leave and take their knowledge with them
- Service gets worse because the remaining employees have too much work
- Teams become afraid to try new things
- Company reputation suffers, especially during layoffs
Employees who stay have to handle not only the additional work but also stress, anxiety, and burnout. Workers might work harder at first to keep their jobs, but they cannot keep up that pace forever, which creates an endless cycle where tired employees reach their limit and quit. What looks like saving money turns into spending more through higher turnover, lower productivity, and worse service quality.
Instead of random cuts, businesses should listen to employees through different channels. This helps find unnecessary expenses and saving opportunities while maintaining both employee morale and efficiency. Regular feedback also helps spot problems early so companies can fix them before they get worse.
Read more: 3 More Cost-Cutting Mistakes to Avoid During a Recession
What should businesses do instead of making risky cost cuts?
A strategic approach focused on long-term sustainability makes cost reduction more effective. Companies that follow well-laid-out progression plans build stronger operations that last.
Process optimisation
The goal of process optimisation is to enhance efficiency within existing operations. Through the process of identifying areas to optimise, businesses can also uncover bottlenecks. To effectively optimise processes requires businesses to dive into their existing data, analyse each performance metric, identify trends, and eliminate bottlenecks.
This granular level of insight allows for targeted adjustments, ensuring that cost-reduction initiatives are aligned with strategic goals and not damaging vital functions.
Additionally, leveraging data also allows businesses to create predictive models to anticipate future changes and opportunities, thus adjusting their processes to mitigate risks. This proactive process optimisation approach, driven by data analytics, fosters a culture of continuous improvement and enables organisations to not just cut costs but also make more informed decisions for resource allocation, investment, and more.
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Technology leverage
Automation plays a vital role in modern cost management. Administrative processes often accumulate indirect costs, but automation helps reduce them. Companies see 15% to 20% lower indirect costs within 12 to 18 months after adding automation4.
Cloud computing offers a budget-friendly option. Businesses only pay for what they use when they move to cloud-based services. Companies that combine cloud solutions with automation see:
- Fewer manual errors
- Better operational efficiency
- Smarter resource allocation
- Smooth collaboration
Data analytics helps businesses discover savings in finance, procurement, and HR through advanced analytics and process-mining tools. AI-powered analytics help companies make quick, smart decisions about cash flow.
Customer Relationship Management (CRM) systems boost efficiency and revenue. Custom CRM systems create better customer interactions and help grow revenue. These systems also enable targeted marketing campaigns that connect better with customers.
Above all is enterprise performance management (EPM) software, a powerful solution that gathers all financial data from different departments in one place, making it easier to track costs automatically and more accurately. The solution also enables leaders to quickly grasp the company’s financial health, often through role-based, intuitive, and visualised dashboards.
EPM systems with advanced tools for scenario planning and predictive algorithms can help users predict different financial results and analyse performance against budget to identify overruns and potential savings.
Read more:Nucleus Reports Infor EPM Improves Financial Productivity by 20 Per Cent
The unified platform eliminates the need for multiple reporting systems. Team members can access dashboards and create reports themselves through centralised data resources.
EPM software works well with existing ERP systems, CRM, and HCM platforms, making budgeting and forecasting more accurate.
To learn more about EPM solutions and how they can power your budgeting process, check out our on-demand webinar: Budgeting–From Manual to Agile
With the current economic downturn, it is unavoidable for businesses to sacrifice some to maintain daily operations. Having said that, hasty actions due to panic or blindly following what others in the industry are doing without looking at the data can do more harm than good.
Process improvements and technology adoption are two of the many ways businesses can look into to streamline processes. For instance, EPM software provides leaders with a single source of the truth, and its advanced analytics capabilities help test drive various “what-if” scenarios.
The road to more effective cost control needs proper planning and careful execution. Companies should weigh short-term money pressures against their future health. They need to protect their core strengths while cutting real waste. Organisations that strike this balance set themselves up as market leaders.
In an attempt to optimise costs, many organisations have opted to digitally transform various processes with cloud solutions. While the cloud is not the silver bullet for all financial crises, it provides the necessary flexibility and security for CFOs and business leaders to focus on more strategic initiatives.
Learn what the cloud has to offer and why modern CFOs are turning to it for the answer with our whitepaper!
Sources:
- https://www.financealliance.io/5-cost-reduction-strategies/
- https://www.gartner.com/smarterwithgartner/7-cost-reduction-mistakes-to-avoid
- https://www.linkedin.com/pulse/what-dod-budget-cuts-taught-me-peanut-butter-spread-lorna-tedder-apgke
- https://www.mckinsey.com/industries/automotive-and-assembly/our-insights/how-industrial-companies-can-cut-their-indirect-costs-fast
