As business leaders aim to ensure the profitability of their organisation, it is necessary to consider expenditure as well as turnover. Companies which generate high revenue are under less pressure to worry about costs, but often, creating efficiencies is equally important as firms look to remain in the black. Sometimes it is essential to seek ways of reducing spending in order to ensure the continuity of business - although company bosses should always take care when adopting this approach.
Reducing costs may be essential for all businesses at some point in their lifecycle - for instance, if sales are down, a new product or service has failed to take off as expected or raw materials prices have risen. But decision makers should always look at the bigger picture, and consider the full range of consequences to their actions. Will cost reduction have an overly detrimental impact on employees or the business as a whole?
Cost cutting can impact on employees
One potential downside to cost reduction is the loss of morale within the workforce. Businesses are reliant upon the efforts of their workers day-to-day, and are incentivised to keep them happy and motivated to work to the best of their ability. Deep cuts - whether this impacts on the headcount, availability of resources or pay and benefits - may have the effect of reducing engagement levels. This is turn can lead to lower productivity and reduced output for the company, which ultimately translates into lower revenue.
Redundancies may help balance the books when companies hit a rocky patch, but the impact of job losses on those left behind can be severe. Seeing colleagues leave the organisation through no choice of their own can be very damaging for individual and collective morale. Workers may also be wondering whether they could be the next to lose their jobs, which creates uncertainty and makes it difficult for employees to settle and focus on their daily employment tasks.
Cost cutting can impact on quality of service
Cost cuts can also impact on the quality of service delivered by a company. This could be on the customer side, with fewer employees available to meet the needs of consumers, which ultimately impacts on their experience. Or it could be in terms of product quality - cheaper materials and faster production can make it impossible for firms to meet the standards they have historically aimed for. Over time, this may manifest itself in lower sales and reduced revenues, creating long-term vulnerability for the organisation.
Business leaders need to consider how the activities they undertake and the costs incurred contribute to their overall business goals. Some expenditure may be seen as essential to enable the company to meet its commercial objective, and if at all possible this investment should be ring-fenced. Companies need to recognise that, in an ever-more competitive business environment, quality does matter and if customers do not receive the service they expect they are likely to shop elsewhere.
Any cost cutting should, if at all possible, be undertaken in areas of discretionary spending which are less likely to have a direct impact on employees or customers. Efficiencies may be achievable through the implementation of new working processes, or through the deployment of technology - which can in fact make workers' lives easier and ensure a more seamless customer experience.
Find out about how Microsoft solutions can assist organisations looking to control business costs more effectively.
Posted by Dan Smith