At the conclusion of a workshop last week, I encouraged a question and answer session as I do at all of my workshops. After the final question, several attendees exchange business cards and asked if they could stay for a few minutes to network and get to know some of the other participants. They also asked if I would join them. As someone who encourages ” “networking for life”, I agreed.
Although most of the discussion revolved around the workshop, one person asked the other business owners about their top business concern. I was surprised when the first response was “cutting expenses”. Two other business owners agreed while the others stood quietly, listening. As the three business owners discussed various methods of reducing costs, including employee benefits, employee incentives, and customer benefits, I was biting my lip. After listening to their laundry lists of standard services and employee benefits that were being eliminated, I could not keep quiet and longer.
A significant reason for my success has been the ability to build efficient and lean businesses. Lean does not mean reducing services or cutting employee benefits. Lean means tracking the operational efficiency of everything from operational processes to the technology, tools, equipment, computers and vehicles. That does not mean having old equipment, computers or vehicles. It does mean determining the point at which it is best to invest in new and more efficient equipment.
As far as employees are concerned, highly successful businesses hire the best, most highly skilled, and most competent employees and pay them better than any of their competitors. It is incomprehensible to expect a low-paid, reduced benefits employee to stay around or not to look for a job at a competitor. One business owner responded that is why he uses non-compete agreements. I sincerely hope that that owner does not believe his own words — if an employee is terminated or has a justifiable reason for leaving, such as reduced benefits or pay, non-compete agreements are virtually impossible to enforce in most states. Besides, who would want an employee who doesn’t want to work at their company and why would a business owner want to invest their energy in suing an employee, rather than satisfying customers and generating new revenue? Keep in mind that most employees consider their compensation and benefits to be a reward for their performance and an indication of the appreciation that their employer has for them.
Cutting costs is a temporary and short term solution.
After leading dozens of successful business reorganization and turnaround initiatives, I learned that cost-cutting is often necessary but it is never the ultimate solution. In almost all cases, a maximum of 20% of costs can be cut from a business without having a significant effect on performance and on the quality of the product or service. In a business that is already somewhat lean, cost reductions of 10%, or less, are typical before the quality of their product or service will be noticeably impacted. Most companies went into cost reduction mode early in the recession and there should be no place for further cost cuts at this time, without reducing the quality of products or services that you deliver.
It is 2011, four years since the recession began, and the economy is gradually but steadily improving. It is incomprehensible that any business is operating with a primary focus on cutting costs. It is time to bear the fruits of the cost cutting and efficiency improvement measures that should have been implemented years ago and maintained.
During the past two years, a select group of businesses have doubled revenue, doubled and even tripled profit margin, expanded their marketing area and expanded into new industries. Each company is unique but each of those business owner approached me with the desire to maximize opportunities. The “cost cutters” are often the business owners who decided to “hunker down” until the economy fully improves and until things “get back to normal”. Either strategy is okay. The problem is the economy is not going to return to the previous “normal” and “hunkering down” is only going to help a business to lose market share and the profit that they could be earning.
When I travel on business, I often stay at business class hotels such as Holiday Inn Express or Homewood Suites. Last week, I stayed at a Holiday Inn Express in Philadelphia. In my room, I noticed that several of the complementary items that had been standard were gone. There was no complementary coffee. The mouthwash, shampoo and conditioner were gone from the bathroom. When I went to iron my clothes, there was no ironing board. I called the front desk and was informed that ironing board are now available on request and one was delivered to my room about 30 minutes later. I thought it was a joke. The ironing board was only about 24 inches high, which is significantly lower than the bathroom countertop. When checking out, in response to my question about the noticeable elimination of basic amenities, the front desk manager rolled her eyes and stated that the reductions were cost savings efforts. Meanwhile, the price of the room increased by $20 per night since my last stay. The front desk manager added that they have not been quite as full as in the past, ever since cutting the services.
When I went to the business center to print my boarding pass, the printer and copy machine were gone. I had to wait in line at the front desk to get my boarding pass because some bean counter decided to eliminate the $200 printer from the business center.
When traveling on business, I always stay at a business class hotel, rather than a 4-star hotel. The weekday business traveler is the lifeblood of these hotels. The front desk manager stated that there has been a noticeable reduction in business guests. I will add to that reduction as this hotel chain has been demoted to my “last resort” list vs. my “preferred hotel choices” list. All this so they could save $3 on an ironing board, $.05 on a printer page (boarding pass) and $.10 on a bottle of shampoo?
In tough economic times, the single most important activity is retaining customers. It is five times as expensive to gain new customers as it is to keep existing customers. As the economy improves, customers and employees will remember, perhaps more than ever, how they were treated by businesses during the recession. There is a reason why some companies have weathered the recession well and others have suffered tremendously. For some it is due to industry trends or market conditions that were out of their control, but there are many times when the business owner could have been more successful by being proactive rather than reactive. Cost-cutting is a purely reactive and short term, tactical move. It is not a strategic move and will not provide long-term benefits.
It is often the bean counters who recommend the cost cutting. Business owners must realize that the financial/accounting function is only one skill set of the many that are required by a successful business. Success requires integration of technical, operational, process, marketing and financial skills. As someone with a strong financial background, I cringe when a business owner states that they are relying primarily on the advice of a CFO, controller or financial advisor to determine what actions they should take, without integrating the advice of people with experience in each of those other key skill sets.
When you make the mistake of Holiday Inn, you fall short of the customer’s expectation in the name of lowered cost. Don’t take the cheap route, like Holiday Inn or the three business owners that I met at the workshop. You will lose a customer over a few bucks. It’s always better to over-spend on customer retention than under-spend. If you lose the customer, you can’t “un-ring” that bell. The same goes for employees.
Venting aside, low-cost business models can be a powerful ally. And they were helpful for many businesses early in the recession. However, now is not the time for most businesses to be focused on cost cutting. Make sure that the level of customer service and satisfaction is acceptable as well.
