“Cut, cut, cut!” This is one of the most overused fiscal mantras recited by company management of all shapes and sizes, yet one not practiced granularly or wisely enough to actually sustain retained earnings.
Cost-cutting — or phrased more positively “rightsizing expenses to improve profits” — requires new mindsets and new frameworks as opposed to old negative hatchets. Today, C-suites locally and globally are re-examining their internal dynamics, fiscal positioning and how they negotiate with vendors and employees to find new value.
About 80% of my consulting experience is turnaround management: Triage finance mixed with operational math, HR improvements and refreshed branding and marketing to revitalize business models — very, very quickly.
Growing or turning around any company’s profits requires finding new value that new customers are willing to pay for — and employees and vendors are willing to deliver.
PROBLEM ONE: Companies facing fiscal trouble typically have no idea which customers are their most profitable customers, which employees are their most profitable employees and which vendors are their most profitable sources of supply or service innovation. They keep doing things the way they’ve always been done and refuse to seek capable advice.
PROBLEM TWO: Failing companies have no idea which costs are making or losing them money. They have no granular grip on their accounting data or if biases exist within their balance sheets. Engaging metrics and sharing relevant data throughout the organization quickly and well is non-existent.
These two problems are why smarter competitors are besting mediocre business models day after day. Rightsizing expenses to improve profits means augmenting your company culture, improving intelligence gathering, and aligning your mission, vision and values with finance and accounting.
My thesis is to implement more positive strategies, more exciting incentives and more granular data collection and analysis via every desk in the company.
Merely attacking vendors or beating discounts out of each supplier transaction going forward is perhaps the most common yet ineffective method. Outsourcing unwisely or quickly to save a few bucks is another fallacy. Trimming costs and improving profits requires a systematic, sustainable approach.
One such approach is to address employees and vendors using positive fiscal terms that suggest exciting challenges, new goals, and value-innovating incentives. The terms “cost-cutting” and “downsizing” typically breed fear and panic and politicking.
Since most employees come to work petrified of losing their jobs, some living from paycheck to paycheck, rarely do they think about quarterly or annual costs, profits, waste, taxes, operational implications or brand value. You want your people to come forward and engage management with helpful, constructive ideas confidently.
In my experience, having your entire company read the same books together each month — titles such as, Financial Intelligence, Getting The Right Things Done or Blue Ocean Strategy (hints) — is one of the quickest ways to begin trimming costs, improving profits and turning a company around as a team, sustainably.
The grossest misconception is that vendors, suppliers and employees must now get beaten up fiscally. Obviously uncomfortable changes and challenging conversations may take place, yet using sugar vs. salt is a far better culture and negotiation strategy. Long-term employee-supplier engagements begin with challenge, reward, wellness and the hope of prosperity — not poverty.
QUICK CASE STUDY
In 2014, I redesigned and rebuilt one of Martina Navratilova’s vintage 1984 Porsche 911s (which subsequently led to a new creative manufacturing start-up). Our first prototype utilized four expert shops and dozens of suppliers over the course of 10 months to engage expert mechanics, metalwork, paint, powder coating, interior upholstery, final assembly and tuning.
Taking a 30-year-old Porsche 911 apart and putting it all back together like new is a painstaking, tedious and demanding process. The mental energy and unplanned overtime that must go into every part, surface, color, material and technique is an excruciating and amazing adventure.
In today’s market and economy, customer treatment of mechanics, industrial workers and craftspeople who perform such tedious work is downright awful. Most shop owners go home beaten and bloodied by sinister customers, barely able to make ends meet, reward employees or look their families in the face.
From the outset, we chose not to beat up vendors and crews fiscally or pressure unrealistic deadlines. We wanted total perfection and quality, so we deliberately rewarded shop owners and crew members for extra value, mindful innovation or overtime works-of-art.
We brought lunch or beers on Friday afternoons. We sent star performers on dinner dates with their wives. We even added 10% bonuses to some of their invoices. They were stunned almost to tears.
The men and women who worked on the Christopher Vehicle Redesign project went home to their families as heroes. They had extra cash in their pockets, something nice for their spouses or little children and the personal pride of being rewarded for their over-the-top work.
At the end of the entire restoration, our costs came in 20-24% less, yet with quality, craftsmanship and final value over 200% of expectation. Were costs trimmed whilst profits and value improved? #BeyondMyWildestDreams!
• Bullying your employees or vendors for more output or discounts is the wrong methodology. Implement a more positive strategy.
• Problems begin to mount when your entire team becomes complacent, fearful, or unwilling to embrace the challenges of harder, smarter work. Implement a more exciting incentives strategy.
• To trim costs and improve profits, new frameworks, policies, and mindsets are required, to know best how and where higher costs and lower revenues are creeping their way into your culture and bottom line. Implement a more granular data collection and analysis strategy.
So, where can your company begin to implement a more sustainable approach to trimming costs and improving profits?
Baron Christopher Hanson is the principal and lead strategist at RedBaron Advisors in Charleston, S.C., and Palm Beach, Fla. A former rugby player, Harvard graduate, and expert on workplace and small-business turnarounds, Hanson has written for Harvard Business Review and SmartBrief considerably. He can be reached for consulting roles and speaking gigs via e-mail or over Twitter @RBC_ThinkTank.