Cutting Costs: The 5 worst strategies

Let’s face it, the glory days of double digit revenue growth are over. Times are tough, margins are shrinking and your business needs to make difficult decisions to reduce costs quickly. Expenses are the most controllable part of the profit equation, so finance professionals across the country are rapidly finding cost reductions in response to declining revenue forecasts.

 

But much like a person trying to shed those extra 20 pounds gained over the last few years, finance professionals will realize expenses don’t come off as easily as they accrued. Crash diets do more harm than good, and many quick fix cost-cutting measures can damage the muscle of a company when you’re trying to lose the fat. Here are some cost-reduction strategies to avoid when you’re tightening the belt.

1. Hiring Freezes
   With the war for talent raging, why in the world would a company adopt a hiring freeze?  The recession could provide opportunities to upgrade talent.  In fact, studies show although recruiting may level off or even fall, the quality of workers hired rises in a recession. Companies that adopt a hiring freeze strategy can inadvertently lose top talent to the companies who are actively looking to capitalize on the uncertainty, unconstrained by a hiring freeze.
2.  Everyone Chip In
   This strategy emphasizes fairness. Everyone chip in 10 percent of their plan to meet the targets. This would be like a group of us going to dinner, I order steak and a nice bottle of wine, everyone else has salad and water, and then I suggest splitting the check equally. Identification of areas of spending that can be reduced may take some time and discipline, but the organization will be better served in the long run.
   Taking a fairness approach to cost reductions is a mistake from which companies spend years trying to recover. Many are quick to cut operational expenses, strategic projects or customer service costs that have an adverse impact on profitability. This can cause a corporate death spiral characterized by falling revenues, more cost cuts and an eventual corporate meltdown fueled by the same short-term thinking that inspired the “everyone chip in” cost reduction strategy.
3. Pinching Pennies While Burning Dollars
   Companies need to make sure the decisions to reduce costs meet materiality thresholds. The worst thing is to pinch pennies with employee perks and burn dollars with executive perks. The cost of this strategy far exceeds the dollars and cents.Recent examples of this are evident in the congressional bailout – executives flying in on private corporate jets looking for a handout to make sure the company survives the economic downturn.
4. Outsourcing Service Activities for Cost Reasons
   Outsourcing to save a buck rarely pays off in the long run. Outsourcing should be limited to those non-strategic work activities for which companies have a difficult time maintaining competencies (High Tech), or limited to commoditized general activities that all companies have in common (Payroll).
   There are additional costs associated with outsourcing, such as vendor selection, process reengineering, time lag challenges and exchange rates. But most importantly, the hidden costs of outsourcing are in a company’s relationship with its customers and employees. These costs can wipe out any gains assumed in the decision to outsource.
5. Doing nothing
   The worst strategy is to ignore the issue. Reducing expenses has a direct positive impact on the bottom line. With the economic meltdown going on today, companies who choose to avoid making strategic cost reductions are not only going to continue to suffer, but also are not likely to survive. 

So the challenge remains: what to cut, from where, and by how much. The obstacle: transparency in spending, and understanding the value, strategic alignment and risks associated with the current expense base.  To overcome these obstacles management needs to dig deep to model and measure the operational drivers of expense.  Taking a disciplined approach to analyze an organizations cost structure, can ensure that a company moves beyond surviving to thriving in this recession.    A strategic cost management approach begins with the customer in mind, providing a detailed understanding of how each customer transaction consumes a company’s resources of people, systems, and money.  Our companies will be defined in the leadership decisions made during the most difficult circumstances and now is the time for making the tough decisions.  Having the discipline to take an objective approach in cutting spending by protecting the core expenses required to generate revenue, investing strategically, and finally eliminating all other non-essential expenses is what will separate the survivors from the casualties. 

 –

Scott Wise is president and CEO of Armada Consulting, a business performance management firm.

Interview in the Tulsa World

This article was recently published in the Tulsa World.  It is probably one of the better explanations of our consulting practice focus at Armada.  

5 questions with Scott Wise

By JOHN STANCAVAGE World Business Editor 
10/3/2008
Last Modified: 10/3/2008  2:59 AM 

1. What does Armada Consulting do?   

Armada Consulting works with companies to improve performance and profitability by giving executives deeper insight into their finances and supporting them with process improvement projects to reduce costs and positively impact corporate performance. 

Our services include strategic planning, financial modeling, business intelligence and organizational development. As companies grow, infrastructure and an expense base is built that is often difficult to understand, and many companies lack the visibility or transparency into the operational drivers that cause costs to rise over time. 

This rise in expenses is usually not an issue as long as revenues grow faster than expenses. However, as revenue growth flattens and margins deteriorate, cost reductions can’t come fast enough. 

Armada assists clients with answering the million-dollar question: Where can we strategically afford to reduce expenses? Too often, organizations make hasty decisions to reduce costs with little regard to the negative impact it can have on their customers, employees, strategy and community. 

2. What aspects of this business attracted you personally? 

I love of solving complex problems and making a quantifiable impact on performance. 
The way we apply business performance management at Armada allows me to exercise my skills in both finance and technology; the practice heavily depends on an ability to “operationalize” the financials of an organization, which, for some of our larger clients, can be very data-intensive. 

All of our consultants have to be equally talented in both finance and technology, as this provides a greater value to our clients in that we can identify the required data and, more importantly, can then mine additional data from operational systems. Our practice also requires a certain level of competitive spirit as we are often challenged to measure what was thought to be immeasurable or too complex to measure with any degree of accuracy. 

3. Do companies seem to put more emphasis on performance management during tougher times? 

Tougher times dictate an emphasis on becoming more effective, more productive and more profitable with fewer resources. 

Cost containment is high on a very short list of CEO and CFO priorities. During tough economic conditions, their immediate reactions are to identify short-term quick fixes. But time and time again, we see the leaders that invested in cost control, continuous improvement and performance management initiatives in the good times are the ones whose companies can ride out and often profit during tough times. 

This occurs for one reason: they have better information and insight into their financials. They can predict revenues and expenses based on forecasted customer demand. 

4. We’ve seen a number of high-profile, seemingly successful businesses implode financially recently. What are the biggest pitfalls fast-growing companies face? 

Fast-growing companies are exciting to watch, and we love to cheer on innovative companies that can grow revenues through better products, better service and better strategies. However, sometimes companies simply “grow too fast” and skyrocketing revenue growth exceeds the capacity to deliver, which then requires a corresponding growth in expenses. 

Priorities are placed on continued revenue growth, and investments of earned margins often follow those priorities, or excessive infrastructure. 

Often these companies fail to make necessary investments in internal controls, cost management or business intelligence systems. 

5. Briefly, what can a company do to build in safeguards or controls that would lessen its risk of flaming out? 

The U.S. economy has recently experienced historic losses in the stock markets. 

In the past few weeks alone the market has dropped more than 10 percent. If a company has a similar catastrophic drop in revenue, how quickly can it respond to maintain profitability? 

At Armada, we believe risk is always a function of the certainty and availability of information. But information is only as valuable as the action it initiates. 

Companies can lessen their risk of flaming out by: 

• Proactively managing costs with a focus on profitable growth over revenue growth,
• Preparing for both unforeseen threats to financial performance and opportunities to capitalize on competitors’ mistakes, and
• Adopting a perspective that embraces long-term strategic decisions based on fact and avoid reactive short-term decisions based on fear.

 

By JOHN STANCAVAGE World Business Editor 

 

Are all customer profitable?

Time and time again the 80/20 rule is proven to be understated when it comes to customer profitability. The fact is that for many companies the top 20% of the customer base makes up 3 to 4 times the companies overall profit, while the bottom 20% loses 2 to 3 times the net income of the company.  The 60% in the middle have little impact on the companies over all profitability.  Companies that have a detailed understanding of the factors that drive customer profitability have a significant competitive advantage. They also have the necessary data to craft there strategic plan towards serving the most profitable customer segments, and cross sell unprofitable relationships a have a much bigger impact on the companies bottom line.

Corporate Titan or Titanic

The highly publicized rise and fall of companies like SemGroup have erie similarities with the story of the Titanic. And like the Titanic it is too easy to dismiss the disaster on the environmentantal variables like an iceberg or a poorly controlled hedge fund strategy. There is a deeper plot to each story, leaving us with the question;  What causes these companies to sink like the Titanic?

Arrogance – The Titanic set lofty goals to arrive in New York a day ahead of schedule, ignoring safety warnings,  more to the point leadership valued goals and visions more than the people around them. They thought the titanic was invincible. The collapse of many corporations begin at the top, the difference being the captains of industry rarely go down with the ship

Speed – Speed caused the Titanic to sink. They were simply going too fast. Likewise companies sometimes ‘grow’ too fast. They are on such a pace that they forget to put in the necessary controls and processes that ensure longevity and long term performance.

Visibility – Lack of visibilty was another key contributor to the sinking. The crew of the Titanic had limited visibility in what lies ahead of them.  Financial strength is usually found in those companies that can accurately predict their revenues and expenses based on customer demand, not speculative measures or statistics.

Maneuverability – The final blow to the crew of the Titanic was maneuverability. The ship was simply to big to correct their course and manuver around the challenges ahead. Likewise rapid growth in an organization often creates additional infrastructure and overhead that make it difficult to respond quickly to both opportunities and threats to a business.

The moral of the story is that the obstacles your business may be on a collision course with are not controllable. But the ability to respond to those challenges with a positive outcome are completely controllable, and that level of corporate discipline is the difference between magnificent success and catastrophic failure.

Consulting or Visioneering?

My addiction to the Apple Store began with the iPhone, it soon progressed to an iMac,a MacBook, and now even MacBook Air.  There is something special about everything Apple does and behind the vision there has to be miraculous feats of engineering to bring it to reality, hence the concept of Visioneering.  While Steve jobs has long been described as a visionary force behind Apple,  without the ‘visioneer’ his ideas would be dismissed as day dreams.  The vision cast at Apple surrounded employees in what has been described as a  ‘Reality Distortion Field”, with developers believing anything is possible.   Today, business has a insatiable appetite for innovation, believing “anything is possible with the appropriate allocation of time and money”.  The concept of ”Visioneering”; taking a vision and engineering it into reality, is definitely a rare talent.  The attributes of “visioneers” are often the characteristics that make great consultants and trusted business advisors.

To be successful in consulting you must acknowledge and accept the difference between the visioneer and visionary. As consultants we have a unique experience of implementing multiple projects at a variety of clients, often very similar in vision or purpose.  We experience various successes and failures on each implementation, and with that experience we gain the capabilities to make the next implementation even better.  However, every company is unique and different and ‘best practice’ at one company may not succeed at another. The worst consultants presume they have all the answers, that their way is best, and that they are smarter than the clients.  But the great ones listen and acknowledge that each project will require customization specific for that company, and that the elements required for that customization can only come from people who work there and live it day after day.  Success happens only when a consultant applies their visioneering skills in serving and championing the unique vision of a strong company leader.  So if you have the heart of a visioneer, find a visionary with a vision and purpose that you can champion. To be a successful you need:

• a measurable dissatisfaction with the status quo
• a clearly communicated vision of what could be
• an executable plan for getting it done

I have had the pleasure of building special client relationships over the years, with some really intelligent, dynamic, and passionate business leaders.  All with visions to make their companies better.  At Armada Consulting we have embraced the concept of Visioneering with a collaborative approach that is part Jerry Mcguire and part Macguyver.  Fewer clients, more personal service, and a ‘can do’ attitude to work with whatever is available to engineer our clients vision, this is our commitment to our clients success both corporately and personally.

Beyond Transparency

One of the many fall outs of the corporate accounting scandals (Enron, WorldCom, etc..) in early 2000, was the concept of financial transparency.   As Sarbanes-Oxley regulations were implemented, the CFO function of organizations began to evolve beyond the corporate persona as number crunchers and budget cops, and was invited to the strategy table.  Not just as integrity champion or implementer of corporate controls and governance, but it was finally understood that Finance is the universal language of business.   Since that time Finance departments globally became actively involved in corporate initiatives, large projects, and strategic decision making.   The role of the CFO became the Chief ‘go to’ officer for everything from Information Technology transformation to back office operations, taking on roles traditionally occupied by CIO’s and COO’s, even becoming heir apparent for replacing CEO’s in many major corporations.
However, there are seasons in life both personally and professionally and while the spotlight has shined on Finance professionals for several years a backlash is beginning.  At the core of this backlash is the same concept that brought the focus to Finance as a strategic partner, Financial Transparency.  In the wake of the implementation of controls, reporting, and systems to ensure transparency, the perception of Finance is slowly reverting back to the number crunching budget cop persona of the past.   Almost as though someone finally had the time to look up the definition of the now corporate buzzword of Transparency, which is “The full, accurate, and timely disclosure of information”.   Business managers are now asking Finance for needed information, or to clarify the credibility of the information, but choosing to interpret, analyze and make business decisions independent of Finance support.  Too often now, presentations and proposals to executive management lack independent review from Finance, while the presenter still emphasizes that ‘Finance provided the numbers’, giving them a Teflon covering in case the proposed action fails.
In order to avoid slipping back in to the corporate dark ages, Finance needs to proactively restore relevance to their craft.  Moving beyond transparency and the simple disclosure of information, Finance must drive performance improvements and empower themselves to be the corporate steward before the next crisis arises.  The following factors can determine your readiness to move beyond transparency:

• Kevlar over Teflon – True leaders are those who would rather challenge what needs to change and face the firing squad than to remain silent and slowly die inside.    Corporate America needs more professionals willing to put on Kevlar to champion change, and less professionals managing with a ‘no stick’ policy in an effort to keep their jobs.

• Insight over Information – The amount of information available electronically is doubling every 12 months, so the adage of information is power no longer applies.  Information is a commodity; the ability to transform information into insight is what makes Finance professionals powerful.

• Performance over Politics – 
It no longer matters ‘who you know’, or even ‘what you know’ in your climb up the corporate ladder.  Success today is defined simply by what you can make happen.  Performance pays; and your ability to execute strategic initiatives that have a positive financial impact will move Finance professionals beyond transparency.

Scott Wise  President, CEO  Armada Consulting

The value of information

I attended a CFO Technology conference in Chicago where the focus was leveraging technology for improving performance.  The most impressive statistic was from a professor from MIT, who stated that the digital storage of information across the United States doubles every 13 months.  Companies spend billions of dollars collecting and storing data with every intent of leveraging that asset to gain insight into performance and innovate processes and products or competitive advantage.  However, the question must be asked; “Where are the resources to transform that information into insight?

The fact remains that the real constrained resource is analysts with the right skills to successfully analyze the data and interpret the results.  Information is only as valuable as the action it initiates. Technology is simply a tool, it cannot replace the ingenuity of a true problem solver armed with the right skills and challenged with a complex problem.  But these information mercenaries are difficult to find and harder to keep.  This issue is not going away and soon we will see a real shortage of true knowledge workers, while companies scramble to find the right people to mine, measure and model their data looking for innovation and competitive advantage.

People say that information is power, but today the ability to transform information into actions that have a strategic impact on a company is the real power.  Here are a few recommendations for building your capabilities in becoming an business intelligence mercenary.

Dynamic Modeling - The first requirement is the ability to understand that that businesses today are very complex and comprised on many difference and sometimes counterproductive systems.   Systems Thinking and Modeling provides us the ability to simplify these complexities and break problems down into a series of related models and variables.  Once mastered an individual can not only model the problem, but identify the required information to mine for proving a recommended solution.

Data Mining - Data mining has become so much more than just understanding SQL, which is still a must.  The most valuable analytical professionals can not only measure and model information, but also retrieve it either through a variety of business intelligence tools, or directly from the source.  Visualizing data relationally, narrowing data sets, and recognizing statistical patterns, provides the analyst a huge advantage in research and analysis.

Predictive Analytics – Few executives can take action on information or analysis without some assurances of success.  Predictive analytics models the data to identify risks and opportunities given a set of sample scenarios, guiding the decision making process and actions taken.

Scott Wise  President, CEO  Armada Consulting

Thawing ‘hiring freezes’ as cost control

A number of companies are reporting cost reduction strategies in the face of a challenging economy.  Many of these so called ‘strategies’ to reduce cost include hiring freezes, basically a strategy to limit new hires and realize cost reduction through workforce attrition.  Hiring freezes as a cost reduction strategy is simply a knee jerk reactionary move that flies in the face of strategic cost management.  The looming retirement of baby boomer workforce has employers struggling to keep pace with hiring needs.  During this war for talent companies can not afford to sit on the sidelines for a couple of years as a method to control costs.  Profits are a function of people and process, the right strategy executed by the right people.  A hiring freeze simply is a short cut easy answer based on archaic practices, and could prove to be disastrous for companies in the long term.

To have a positive impact corporate finance should carefullly look at corporate spending and the alignment of that spending to strategic objectives.  When times get tough, the tough do 3 things:

1. Protect the Core - ensure that spending that directly supports current revenue streams is not adversely affected by cost reductions.  In fact these areas may need additional funding to protect revenues, market share and customer value in a weak economy.
2. Invest in top strategic initiatives – only approve funding on projects or positioning efforts where it is clearly aligned to the company’s top strategic objectives, focusing on those that should provide the highest return on investment.
3. Mitigate ‘real’ risks – too often the ‘sky is falling’ approach is used to secure funding for initiatives.  Fear should not drive stakeholder spending decisions.  Finance has to make sure that spending to mitigate risk is effective and protecting the company against a real and reasonable threat.

However, if these cost reduction strategies prove to be to challenging to implement.  A better alternative to hiring freezes would be to eliminate corporate ego spending such as corporate jets and other unnecessary luxury purchases.

Scott Wise  President, CEO  Armada Consulting

Sacred Cows of Corporate Costs

After 15 years of finance and cost management experience, it amazes me that there are still the sacred cows of costing that are off limits from any expense reduction discussions.   I was working with a client on implementing a pretty sophisticated cost management program and identified the low hanging fruit as being the company’s multiple corporate jets, crews, and hangars.  The company had no remote operations, and commercial schedules covered the other facilities well.  The discussion was quickly put to rest when it was declared that the corporate jets were off limits and not to be discussed.  This isn’t the first time I have encountered the jet set sacred cow, and I am sure it won’t be the last, but for some reason this time it got to me.  The ironic part of the story was on my flight home.  I was flying Southwest and I recognized a businessman boarding (in the B group no less), he happened to be on the Forbes Top 25 richest Americans list.  Amazing, I can’t talk about the Corporate jets and one of the richest men in the US is flying on Southwest.

For those who are unfamiliar with organization’s ‘sacred cows’, here is the definition:  A sacred cow is something in your organization that you do not question or challenge, even if you ought to. These are practices that are unreasonably immune to criticism.

Leadership is the one thing that will always kill the ‘sacred cow’.  It is simply the decision in which you trade your Teflon business suit for one made of Kevlar, and decide that challenging the status quo and facing the firing squad is a better alternative to dying slowly on the inside and doing nothing to improve the business.

Scott Wise  President, CEO  Armada Consulting