The Corona pandemic has and continues to affect organizations in various ways. Most organizations have experienced financial distress and have implemented cost-cutting strategies with the aim of reducing expenses or improving their bottom line. Some organizations have engaged in serious cost-cutting activities without much thought and used the pandemic as their scapegoat. Some have used this strategy for survival and continued operations. The question each and every manager should ask themselves is whether what they are doing is sustainable or not.
It is critical for organizations to understand that for survival and sustainability, the cost reduction must not affect the service or product quality. Strategically speaking, cost reduction initiatives only bring temporary financial relief to an organization. The cost-cutting initiatives most organizations engage in are not sustainable. This is because such organizations treat the symptoms and implement a quick fix strategy and end up postponing the root cause of the problem.
There are four major cost reduction strategies that an organization can implement. They include cost savings, cost avoidance, cost containment, and value enhancement. Cost savings result in quantifiable monetary benefit whereas Cost avoidance reduces or eliminates future cost. Cost containment is about reducing your expenditure and keeping the costs low and within the planned limit. Waste reduction is one of the most effective cost-containment strategies. Organizations should endeavor to identify and minimize their waste. Value enhancement has to do with the organization’s willingness to pay for financial value. What strategy is your organization using and is it sustainable?
The assumption that when you reduce cost, the cash flow will improve and you will remain in business is flawed. An organization should use a cost-cutting strategy to prepare for growth by freeing up resources to fund the growth. The organization should cut costs that do not align with its business strategy. You cannot cut costs on the core areas of the business and expect growth. A cost-cutting strategy only becomes sustainable if the organization avoids waste.
Organizations must understand that just because they can cut costs, doesn’t mean they should. The organization must carefully carry out a cost-benefit analysis before engaging in any cost-cutting strategy. This is because cost-cutting may adversely affect employee morale hurting your business further. The goal of cutting cost strategy should be future growth and not just keeping the organization afloat. If you lay off staff today, don’t you think you may spend more later to recruit? You must therefore look at the bigger picture before you implement the cost-cutting strategy.
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Dr. Mary Mugo
Strategy, Governance and Management Consultant