Mandatory Cost Cutting is NOT the Answer

red_ceremonial_scissorsThe first reaction of most companies is to start to cut costs during times of crisis.

This approach has short term rewards, but most of the time long term negative effects on the business.
When businesses start cost cutting drive they say things like:
o    ‘cut 20% off all our spending’
o    ‘No more overtime’
o    ‘No salary increases’
o    ‘No catering, for internal meetings’
o    ‘Hiring freeze’ etc
These approaches might all seem like the right thing to do, but they are very reactive approaches.

This approach to ‘managing’ costs can only be for a short period as it can be realistic to never hire anyone again!!

Also this approach can leave employee feeling disgruntled as they have to work with limited resources (people, products, time) and also  start to feel unappreciated. Working with limited resources and unhappy employees has a direct impact on your product /service and can lead to unhappy customers, who will eventually move on to one of your competitors.

So rather than ‘cutting costs’, look for ways to manage your costs and work to having a cost management culture.

Having a cost management culture simply means becoming a cost conscious organization. I would advise that one of the best ways of doing this is by allowing everyone to be part of the solution.

Involve your employees in the cost management of the business, rather than just being on the receiving end of ‘cost cutting orders. Monthly meetings can be held to review the operating costs of the department/business.  I would also show the profit, so they can see the fruits of their labour.  But I know for some businesses this is information they would prefer not to share.

At these monthly meetings, show the costs against budget both the month and year to date and ask questions about the data and set future agreed targets together (focusinng on the high costs areas first).
Sample questions:
o    Why do you think we over spent this month?
o    What was different this month from last month?
o    What ideas do you have to bring these costs down?
o    Is our budget realistic? If not why not?
o    What can you personally do, to reduce the costs in the coming months?
o    What are you thoughts on the quality of the materials we use?
o    How can we reduce the wastage next months?
o    What are your suggestions on how to reduce overtime?

In the following month, review the costs with the team and compare the actuals with the targets agreed the previous month. If achieved, agree how you will celebrate. If not achieved work with the team to find out why and agree what needs to be done differently in the current month.

By involving your employees, they get to understand the impact they have on the department /business expenditure, they feel more informed and more engaged in the business. Also if they are the ones to come up with the solutions, they are more likely to adhere to them and ensure that their peers also follow suit.

I would advise companies to hold this meeting every month, not just in times of crisis.
This approach can become part of how they operate the department/business. Both the management and their employees will develop long term realistic cost management solutions that can achieve huge positive gains for their department/business in the long term.

Georgina Terry
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