Don’t slash and burn in the drive for cost savings

When times are good, businesses are tempted to extravagance, hiring staff, moving into new premises and diversifying product ranges. But when things get tough, you must seek more efficient ways of doing things.

Many companies react to hard times by cutting advertising and marketing budgets, but this can be a mistake. It is better to review your processes, focus on core markets, and avoid wasting time and money on unprofitable areas. “The slash and burn approach to cutting costs is very dangerous,” says Rob Allison, managing director of Southampton-based consultancy Expense Reduction Analysts (UK). Such a drastic approach is often unnecessary.

One company was spending up to £60,000 a year on corrugated cardboard boxes. They’d been doing it for 10 years, but in that time the technology of box manufacture had moved on so the boxes were overspecified. “By reducing the specification and stock levels, they managed to lop about 30 per cent off their annual spend,” says Allison.

Such simple steps as clearing your desk and letting the answerphone take calls can help improve business efficiency. Tania Lewis, business adviser at Sterling Design Services, says if you can see less than 80 per cent of your desk then you are probably suffering from ‘desk stress’ and need to tidy up. “The most effective people work from clear desks,” she says.

Huge amounts of time taking on too much, allowing disruptions, failing to delegate, being disorganised and letting meetings overrun. “Remember time is money and if you waste it you will earn less,” says Lewis. Making staff redundant can be a quick way to boost profitability. It worked for Elizabeth Gooch, founder of business software company EG Solutions, after she took her eye off the UK market in pursuit of new business in South Africa and the Netherlands.

Having reported losses of more than £800,000 in 2007, Gooch set about shedding staff. She managed to cut costs by £1.2m, returning the business to a pre-tax profit of £50,000 in the six months to the end of July 2008. But take care when issuing P45s as you don’t want to lose key staff who are a vital resource. “If times are going to be tough, you need that resource working to its best,” says Allison. “Implementing a strong cost management regime can save you as much as a key member of staff would cost.”

One effective strategy is to cut inventory—most people keep too much. If the rate of goods going out has slowed, raw materials will be stockpiling in your store. Often people keep ordering out of habit, says Allison. “If these habits are maintained when everything else changes the warehouses quickly become overloaded with raw materials, which may become redundant if your products change.” Reducing inventory allows you to be much more flexible as well as cut costs.

One point about cost management often forgotten is that it needs to come from the top. People won’t look for ways to save money if they see their boss behaving extravagantly. Allison suggests the chief executive send a memo to staff saying his or her secretary will collect all pencils, biros, stationery etc not being used so they can be returned to the stationery cupboard. “The chances are your entire consumables bill for the next month will be halved,” he says.

It also pays to go green. Look at your energy use. Switch off all unnecessary lighting, and use recycled paper wherever possible.

One good way to minimise costs is to look for alternative suppliers. This will help renegotiate terms with existing suppliers and spreads the risk so your business isn’t vulnerable if they go down. On the other hand, you need to think about the costs of a potentially disruptive switch in supplier.

And don’t repeat the error of Schwinn, the leading US cycle manufacturer for 80 years, which alienated its two key suppliers Giant and China Bicycles. The company was arrogant and failed to foster co-operation and teamwork, says Professor John Mullins of The London Business School.

Schwinn antagonised key partners apparently not realising that one’s team includes more than one’s employees, says Prof Mullins. “Bankers, suppliers and dealers count too. Business, like entrepreneurship, is a team sport, and Ed Schwinn was not a team player.” Schwinn eventually went bankrupt after its debt to Giant and China Bicycles ballooned to some $30m.

Sometimes a supplier can become part of the solution—Chrysler’s Supplier Cost-Reduction Effort (SCORE), creates shared responsibility for innovative ideas to get cheaper parts. The goal for each supplier is cost-cutting opportunities that equate to 5 per cent of its annual billings to Chrysler. The collaborative programme has generated a flood of more than 100 ideas a week and an estimated savings of $2.5bn.

Some companies save money by taking over their suppliers to become more vertically integrated, for example restaurant chains owning farms, or car-makers owning tyre manufacturers. Conversely, non-core activities can be passed to an outsourcing or offshoring company that can perform the same task more effectively or transfer the activity overseas. The latter approach can work particularly well in areas such as telecoms, software, and technical support.

Reviewing the supply chain can even give you an idea for a new business, as happened at Dawnvale Café Components. Founders Neil Guest, Darren Wrigly and Paul Handley were working at a catering equipment supplier when they had the idea for their new venture.

Clients had been complaining about the problem of sourcing kitchen and bar machinery equipment, often from multiple suppliers. This meant the equipment did not always match, or even work well together, and made purchasing expensive and time consuming.

The three partners spotted a niche designing and installing kitchens and bars to provide a service that maximises space utilisation. Moreover, they quickly realised that the bar installation segment is the most lucrative as it has few competitors, so they focused Dawnvale on this.

There are many ways to save money in business. What you shouldn’t do is ignore the need to cut budgets, or conversely rush in with a slash and burn strategy. The best approach is to examine why your current approach isn’t bringing in the desired results, and rework your efforts systematically.