Make Cuts That Make Sense to Your Business and Your Customers
TEC Worldwide is an international organization of more than 7,000 business owners, company presidents and chief executives. TEC members meet in small peer groups to share their business experiences and help one another solve problems. The following questions and answers are based on recent TEC meetings in Southern California.
Question: With the economy starting to look gloomy, we’re anticipating flat sales for the next six to 12 months. I’d like to implement a formal cost-cutting program to maintain margins, but I’m not sure where to start. Any ideas?
Answer: When faced with declining sales and shrinking cash flows, many companies make ill-advised, across-the-board cuts. Instead, pick your spots and identify where a few well-planned and surgically implemented cuts can make the biggest difference, suggests turnaround specialist Jerry Goldress of Incline Village, Nev.
Start by looking at each activity in the company and asking, “How does this activity support customer needs? Does it contribute to customer value?” If the answer is no, stop doing it.
If an activity adds value to the customer but doesn’t fit your company’s core competencies, consider outsourcing it to reduce costs.
In the past, companies could pass on the cost of superfluous activities to the customer. In today’s highly competitive global markets, customers won’t pay for activities without value.
Once you’ve eliminated or outsourced nonessential activities, turn your attention to cutting costs in your core activities.
According to Goldress, a formal cost-cutting program consists of three elements: cost control, cost avoidance and cost reduction.
Cost control involves things you do as a matter of course--budgeting, approval systems, cost systems, etc. The key with cost control is setting up effective systems and having the discipline to use them.
Cost avoidance involves looking for alternatives to spending. Before making any major capital investment, ask, “Is this expense absolutely necessary? Are there other, less-costly ways we could achieve the same results?” The key element here is taking the time to do the analysis.
Cost reduction involves consciously and deliberately reducing costs. This requires a mind-set of continuously looking for new and better ways to improve operating efficiencies in your business.
If you’re serious about reducing costs, use direct costing to identify fixed and variable expenses for each segment of your business and look for areas that will yield a disproportionate return on your efforts.
Put a “superstar” in charge of implementing the cost-cutting measures, give him or her a specific goal and the power and authority to get things done. Consider offering financial incentives to your staff based on a percentage of the money saved.
Tenacity is the key. Constantly communicate the importance of cutting costs, develop a culture where people are never satisfied with the status quo, and use new technology to continually increase productivity.
In today’s markets, cost cutting should be a standard operating procedure, regardless of the state of the economy or your company’s sales.
Q: Based on the increasing volume of international customers on our Web site, we have decided to open a branch in Europe. Our management team has very strong operational skills; what we don’t have is international experience. Do you have any suggestions for handling the cultural issues that we know will arise?
A: As the Internet continues to break down borders and barriers, your situation becomes increasingly common.
The first step is to determine whether an overseas plant/office is really necessary.
Will the return justify the costs in terms of time, resources and the attention of your management team? If so, you would be well-served to take a crash course in international etiquette and multicultural issues.
Lance Descourouez, an independent consultant in Mountain View, Calif., specializes in helping multinational companies overcome cross-cultural team building and communications barriers. He recommends the following: Think globally, act locally. Develop an overall international growth strategy, but tailor your approach to each specific country and market.
Use a cultural “informant.” Develop a relationship with someone in the local market (preferably a native citizen) who knows the language and culture and has the contacts to open doors in the country you’re entering.
Be flexible and adaptable with your structure, timing and investment. Focus on how to conduct business in each specific country. Don’t expect your domestic structure to automatically work in other cultures. Know the local business customs and laws, particularly as they pertain to your product or service. A little advance knowledge can go a long way toward derailing potential obstacles.
Recruit skilled nationals. Whenever possible, hire local workers rather than exporting employees from the U.S. Provide technical training for your foreign key executives. Bring your foreign senior executives to your U.S. headquarters so they can experience first-hand your culture and way of doing business.
Be selective and strategic with all methods of market entry. Research and critically evaluate all potential markets prior to taking action.
Finally, expect that your timetable for implementation will probably take longer and cost more than you expect. Ask a lot of questions, go in with your eyes open, and don’t take anything for granted, even in other English-speaking countries.
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If there is a business issue you would like addressed in this column, contact TEC at (800) 274-2367, Ext. 3177. To learn more about TEC, visit https://www.teconline.com.
