For the last 6 months, the world is anxiously watching the latest economic developments and anticipating the upcoming recession. The big picture looks grim indeed – inflation rates rise, startups lay off hundreds of their employees, and customers are cautious about making big investments, preferring to save for a rainy day instead.
In such an environment, financial team leaders and founders have to be all the more strategic about their budgeting decisions and look for ways to trim expenses without jeopardizing operational efficiency.
- Why the traditional approach to fighting inflation is not enough
- New approach to cost-cutting: focus on process optimization
- The Bottom Line: Where Leaders Should and Should Not Cut Costs
Why the traditional approach to fighting inflation is not enough
In the effort to reconcile rising prices and ensure consistent revenue without putting too much pressure on the end customer, product and service providers are revisiting manufacturing schedules and pricing strategies.
The most straightforward strategy is increasing prices in line with the Producer Price Index (PPI) growth rate. It should then follow that organization leaders should increase the costs of their product lines by about 7%.
That alone, however, is not enough.
Pricing increases alone will contribute to dips in consumer demand and may affect the company’s total revenue. That’s why a subtler, less obvious to the buyer approach, is needed to tamponade inflation.
Some leaders saw organizational restructuring, mostly through the means of talent lay-off, as a way to trim expenses and regain the upper hand. However, this strategy backfires in several directions.
For one, companies incur significant reputational damage by laying off a significant part of their workforce. If restructuring is not done properly, employees who were let go will take their frustration to social media and the press, resulting in a stream of negative market signals.
Also, by trimming head counts, business leaders reduce the organization’s overall productivity, limit its growth potential, and risk losing valuable market penetration opportunities.
In the long run, a bootstrapped organization will not have the tools needed to bring in new customers and address their objections.
Thus, teams should strive to cut costs in ways that don’t directly affect operational efficiency, imply severing ties with the customer base, or result in a PR crisis.
New approach to cost-cutting: focus on process optimization
In our experience of working with thousands of organizations across all sizes and verticals, leaders often tend to disregard day-to-day expenses. In fact, managers often have no visibility over small budgeting decisions or a clear idea of how these choices fuel the company’s growth and development.
That’s why we propose a five-component approach to cost-reduction that will help leaders keep the momentum going throughout the upcoming recession. We will focus on the effects and ways to implement visibility, automation, analysis, flexibility, and strategic thinking in creating a cost-cutting umbrella for organizations.
Component #1. Automation
One of the ways to account for inflation is by reviewing the company’s processes and determining if your organization’s employees are not losing productive time engaging in manual, repetitive activities. Once you pinpoint manual workflows, explore potential ways to automate them:
- Robotic process automation (RPA): bots that carry out monotonous tasks in an error-free way. The processes falling in the bucket of RPA are invoice emission, email management, report generation, and data gathering.
- Data visualization and self-service analytics support leaders with real-time insights and fuel data-driven decision-making.
- Quality control automation improves the speed and accuracy of testing, eliminates human error, and saves inspection leaders time for other items on the agenda. Automated quality control should be a fine-tuned collaboration of a human and a machine to help deliver an error-free product to the market even with the need to bootstrap operations.
Component #2. Visibility
The lack of visibility over their spending is another reason why teams can struggle to manage inflation and find ways to trim expenses without efficiency losses.
In a period of turbulence, having a clear understanding of recurring expenses, their purpose, and decision-makers is critical.
Team leaders should create an easy-to-update (possibly automated) budget tracking system that would offer a big-picture view of company-wide expenses, as well as the resources used by each individual department.
Establishing a clear-cut approach to spend analytics starts with following several ground rules:
- Get control over external spending. Solutions like enterprise resource-planning systems (ERPs) help create a single source of truth for all expenses and identify key spend drivers. With all the expenses laid out in the open, business leaders can pinpoint the areas of low ROI and eliminate them or identify potentially high-yield opportunities and explore them.
- Compare your numbers against other organizations. Whenever possible, try to get an understanding of how other market players are navigating inflation ups and downs. This way, you will understand which fluctuations are common for the markets and which have to do with your organization’s strategic shortcomings.
- Make budget data accessible to team leaders but protect it from external leaks. When aiming to achieve transparency, leaders should walk a fine line between accessibility and vulnerability. That’s why key security concepts like “the rule of least privilege” should be the very backbone of your document-sharing policy. For every resource you create, identify the list of stakeholders who need the data for decision-making and encourage them to not share confidential information excessively even within the organization. Similarly, make sure you have a legal backbone for countering potential budget data leaks or employee negligence scenarios.
Component #3. Analysis
While data gathering and increased spending visibility are crucial for determining what is putting a dent into your budget, siloed data signals will not be helpful in developing long-lasting contingency plans. Only through putting individual insights into a single big-picture view, leaders can separate strategic and non-strategic expenses.
Business intelligence tools help organizations get a sense of direction and make concrete decisions based on data signals coming from all directions and gathered over a period of time.
The key benefits of using BI are:
- Identifying high-cost and low-demand inventory and trimming its production.
- Analyzing the return on investment for marketing campaigns to determine which customer personas and value propositions give the highest yield at the lowest cost.
- Improving employee engagement, reducing attrition, and increasing productivity. HR intelligence tools and analytics dashboards help predict employee morale hikes and alarm team leaders to shift focus to team building and retention if necessary.
Component #4. Flexibility
Rising inflation and looming recession encourage team leaders to adopt an “ad hoc” mindset. Instead of committing to potentially impactful decisions – new office space construction, large-scale talent expansion, managers should look for ways to make their infrastructures salable up and down and as resilient as possible.
Specifically, organizations should be flexible in the following areas:
Rising housing costs are one of the most prominent effects of rising inflation. Sub-leasing in urban centers will get increasingly expensive over time, leaving organizations with a budget drain. Rising energy and fuel costs will lead to expensive office maintenance. Other than that, after the pandemic, the ability to work remotely is the most sought-after employee benefit on the job market.
Thus, all things considered, scaling down office spaces and opting for flexible solutions is a smarter approach. At oVice, we’ve helped companies reduce their reliance on physical space and increase organizational unity when working remotely by supporting teams with virtual office spaces. Working in a common digital space helps. To a degree, emulate the sense of proximity and accessibility present in an office, without requiring risky long-term investments.
With future prospects unclear, refraining from large-scale hiring and switching to an expand-as-you-grow mentality is a fairly reliable way to counter inflation. In fact, forward-thinking leaders have already realized the benefits of expanding the pool of contractors, gig workers, and other types of alternative workforce.
#5. Strategic thinking
Before making cost-cutting decisions, executives need to make sure that they keep investing in strategic capabilities that drive revenue and progress and cut non-essential expenses. Team leaders need to draw a line as to when they should prioritize the best quality versus cost-effectiveness.
Collecting data across all levels – rep, account, VP, analyzing it, and determining its long-term impact on the organization’s strategy will help identify “leaky buckets” and pinpoint operations that erode cost margins.
Also, while inflation might seem a long-lasting trend, history shows that what goes up does necessarily come down – inflation rates fall and the economic landscape stabilizes. That’s why it’s important that leaders maintain a long-term outlook and prepare their responses for inflation with a deflationary world in mind.
The Bottom Line: Where Leaders Should and Should Not Cut Costs
Summarizing the key priorities organization leaders should adopt as they are getting ready to weather the upcoming inflation storm, here is the list of recommended and not recommended cost-cutting targets.
|Recommended for cost-cutting||Not recommended for cost-cutting|
|Promotion tactics with low ROI||High-demand inventory|
|Low-demand, high-cost inventory||Talent and employee experience initiatives|
|Low-demand office spaces||Process automation and other efficiency-oriented tech|
|Underutilized technology||Employee benefits associated with flexibility and well-being|
|Underutilized employee perks||Security software|
In our experience at oVice, drastic operations shifts such as transitioning to remote or hybrid work models are powerful cost-cutting mechanisms. Learn how team leaders can maintain a high-performance team without relying on physical proximity by exploring our posts on remote work.
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