Share on linkedin
Share on facebook
Share on whatsapp
Share on twitter
Share on email

Focussing on cutting costs is costly

By Dennis Keay

When I observe the actions of some business owners and leaders, they seem to have a very strong and single-minded focus on cutting costs and saving money. The business owners typically do it out of ignorance, that is, they simply believe it’s the best way to grow their business. They’re not necessarily doing it because they’re short of cash…sometimes they’ve got very healthy cashflow and plenty of money in the bank. They think that’s evidence that they’re running the business in the best way possible. What they often don’t realise is that their hidden costs and opportunity costs are much higher than they need be. Let me explain by way of example:

There’s a particular business in a rural town that a friend of mine works for. They’re in a very healthy financial position with plenty of demand for their product. However, they’re paying their workers poorly and pushing them hard. They have dissatisfied workers and several of the more senior management positions seem to be a revolving door every year or two.  What’s the cost of going through the constant recruiting cycle? What’s the cost of bringing people up to speed? And, what’s the opportunity cost when good people leave the business, and take their knowledge with them? When business owners don’t see the value in their people, and invest in them accordingly (not simply via the pay packet, but in many other ways), then they’ll only get a limited and short-term return, and a large longer-term loss. That’s the cost of ignorance!

So, then there’s a sub-set of business managers (I hesitate to call them leaders) who rapidly jump from company to company, climbing the corporate ladder. They’re not ignorant at all. They know that short-term cost-cutting can lead to longer-term losses for the company…but they don’t care. They don’t have loyalty to the company…their sights are on getting their next role in their next company. For them, they develop a reputation for helping companies quickly cut costs and make the profit and loss sheet look good…in the short term. That’s pretty easy to do. Just defer expenses that you should be making now…let’s say, for example, let’s put-off major maintenance till next year…that’ll save a few bucks. Let’s cut the travel and training budget! That’ll save a few bucks more. Let’s cut some corners on investment projects to bring them under-budget.

All looks good for the next year or so until poorly maintained equipment breaks down and repair or replacement costs blow the budget; employee turnover increases through dissatisfaction because they’re treated as an expendable commodity; and the new investment project under-performs and doesn’t meet its original design intent because critical elements have been stripped away in the name of cost-cutting. But, by the time all this has started to bite the company’s financials and future…that’s someone else’s problem…the ‘cost cutting manager’ has already left the building…and is wreaking the same damage with their next employer. You may have witnessed the same type of behaviour in politics.

Well, that all seems like a bit of rant, but thankfully, there is a great flip-side.

I recently had a conversation with a rather humble and forward thinking business leader who, in passing, mentioned, among other things, that they’re doing quite well despite the country-wide shortage of skilled labour. It didn’t take long to realise that the staff turnover wasn’t because they were paid excessively, but rather, that they were appreciated, respected, and satisfied. Essentially, they were loyal, and that’s something you can’t buy with money. That speaks to the leader’s character.

This leader’s focus wasn’t on cost-cutting, and ‘saving money’ but on the bigger picture of ‘making money’ for the business, and doing it strategically by investing in good people, developing them, and retaining them.

If I ask a business owner or leader what their key priority is, and get the answer, “to save money”, I usually follow-up with a question such as, “What’s the purpose of the business…is it to ‘save money’ or ‘make money’?”.  Never has anyone told me it’s to save money. A simple shift in focus from saving money to making money brings with it a whole new range of exciting possibilities for the business. There’s an analogy that comes to mind…

I’ve done a couple of Advanced Driver Training courses in my time. Certainly not bragging…I’m no expert in that field, but one thing I learned is that you should always focus on where you want the vehicle to go. This is true even if you’re in an emergency braking situation heading towards a tree. Don’t focus on the tree…that doesn’t help you. Instead, focus on where you want the vehicle to go…you’re much more likely to end up where you want to be.

Your business is a vehicle for making money if controlled correctly. If your business purpose is to make money, then make sure you don’t simply focus on cutting costs, at any cost!

Business insights

Not receiving your weekly dose of Lean Logic business improvement articles? Subscribe below for more articles like this one delivered straight to your inbox.