Cutting costs the smart way

COMPANIES THAT undertake a cost-cutting program without a strategic plan will fail to maintain the reductions over time and risk alienating key talent, a recent discussion paper has warned.

For many companies, overhead reduction is the first line of attack when trying to reduce costs, yet many approach it in an ad hoc way.

“A strategic cost-reduction plan will help the company to become leaner, more nimble and more competitive over the long term,”said Phil Harkness, vice president of A.T. Kearney Australia, which released the paper.

“In fact, these are the kinds of things companies do even without the pressure of a slowdown, but the current economic climate will make it unavoidable for even more businesses in the future.”

Acting hastily by simply cutting head count across the board, however, means the volume of work remains the same,only with fewer people to undertake it, he said.

“The consequences are predictable: a workforce resentful of its increased workload, lower engagement levels and reduced productivity. In most cases the costs creep back over time as the reductions were not sustainable,”Harkness said.

The solution is to take a more strategic approach; applying a scalpel to the company rather than a hatchet, according to the paper.

One of the most under-used but effective ways of boosting the bottom line is through improved procurement processes.

“The cost of goods and services is, for most companies, the biggest cost item on their P&L.

Making savings here can have a major impact on the bottom line,while avoiding the pain of cutting staff numbers,” Harkness said.

By undertaking strategies such as volume concentration, best price evaluation, and global sourcing,costs can be trimmed significantly.

While procurement isn’t the sexiest of topics for most business leaders, he said large companies could expect to make 5 to 10 per cent savings each year from procurement.