I live in California and of course all the talk on the radio, at water coolers and in homes is the financial mess the state is in and how are they going to address the deficit. The legislature insists they need to raise taxes to increase revenue and in the last election the public has said no more taxes. Meanwhile the state keeps spending. They are caught in what I call ‘The Profitability Vice’.
The Profitability Vice is where there is upward pressure on cost and downward pressure on prices/revenue. This happens to businesses also and in this economy it is happening more and more. If the CEO does not find a way to reduce costs or get an infusion of cash, the company will be in serious financial difficulty if not bankruptcy and liquidation. Conventional thought says the only option is to cut costs across the board or borrow money. This is always painful as we are experiencing with the debate in the California legislature. If they borrrow money the problem is not really solved and future costs go up due to increased interest. Accross the board cost cutting simply hurts everyone and in the end the cost always come back.
The best option is for the company to become more efficient, therefore enabling the company to make strategic cost reduction. A company becomes more efficient by streamlining business process and effectively using information technology. Almost every company in inherently inefficient due to growth and the evolution of technology. There are numerous options available today to even smaller businesses that were not available just a few years ago. Assessing the business to identify areas of inefficiency and solutions to reduce that inefficiency can often reduce manpower and other costs and improve customer service. I will discuss some of these in future posts.
In addition to improving efficiencies, strategic cost reductions can be made by renegotiating services. Many companies do not regularly review the spend of key services and as they grow this can represent areas of opportunity for cost reduction. Mid-market companies often pay more for services than larger companies because of the volume or just because they don’t have the manpower to spend time negotiating these items. There are firms that offer free analysis and renegotiation of key cost areas and are paid only on real savings.
So have an assessment of your business done before you make random cuts and loosen the grip of ‘The Profitability Vice’.