Achieve Sustainable Cost Cuts by Adding Value to Business Processes
Cutting costs from a business can be deceptively easy — at least initially.
Trimming low-hanging fruit by, say, no longer providing free coffee in break rooms, disengaging from consulting services, laying off temporary employees or removing a layer of management can result in considerable savings. However, these savings often aren’t sustainable.
Slowly but surely, decisions will be made by front-line employees and managers alike that add costs back into the business. Often sooner rather than later, many companies find themselves back in the exact same place they were before the costs were cut — only now employee morale has plummeted because of layoffs (or lack of free coffee) and there’s a much dimmer view of cost cutting throughout the company.
Take a Different Tack
Implementing cost reductions that stick over time calls for a different approach. Instead of pursuing cost reductions to satisfy a short-term goal, consider adopting a longer-term approach that focuses on identifying value within business processes.
Depending on the size and complexity of your company, there may be thousands of complex processes in place to deliver the end product or service to customers. Unfortunately, complex processes often include waste, abuse and fraud. Consider the following approach to improving your internal processes:
Document everything. Before changes can be implemented, existing processes must be fully understood. Many companies view this step as unnecessary because they’re aiming to replace or at least substantially revise the current processes. However, the existing elements of a process must be fully understood before they can be effectively changed. Revising a process that isn’t understood could lead to mistakes, cost increases and declines in employee morale and customer satisfaction.
Focus on adding value. While reviewing and documenting an existing process, identify elements that are value-added. A value-added element is an activity that customers are willing to pay for or is crucial to preparing the product or service for the marketplace. Conversely, non-value-added elements include steps that have appeared randomly in the process over time, are in place to account for technology deficiencies, or are just badly designed and/or were poorly implemented in the first place. Once the entire process has been divided into value-added and non-value-added elements, the work to design a new and improved version can begin.
Envision the future. Having identified the value-added steps will allow your company to build a brighter future around those elements. Eliminating waste entirely from a process is exceptionally difficult to do. However, focusing on the “must haves” or value-added steps will bring waste to light. Once value is identified, waste in a process can be more readily minimized. In addition, once waste is removed, it will potentially be harder to add back into the process.
For example, at one company, the process for granting pricing exceptions for large customer contracts included a review by representatives from the sales, operations, production, legal and finance departments. Creating a streamlined contract pricing exception process meant including only the departments that add value to the process while eliminating the non-value-adding departments that were generally only “rubber stamping” the exception anyway.
Estimate the financial impact. Before a revised process is implemented, estimate its desired financial impact. For instance, the financial benefits could include a reduction in staff needed to perform the process, a reduction in office supplies or an increase in revenue attributable to the process. A dedicated process improvement scorecard can help justify the time and effort expended to revise the process and also provide sufficient information to monitor the process to ensure costs and inefficiency don’t creep back in.
Use incentives to energize employees. Launching sporadic cost-reduction exercises results in big cost savings that are often unsustainable. Once the financial goals are achieved, employees and managers tend to resort to their previous behaviors and costs slowly escalate. Engaging employees in the process can help break this vicious cycle. Instead of periodically launching cost-cutting efforts, consider adopting a “continuous improvement” mindset that focuses on baking value into every process, not just removing costs. When employees are able to demonstrate that they increased the percentage of value-added tasks in a process, recognize and reward them.
For example, a front-line employee with a golf club manufacturer suggested his department perform the final cleaning of the finished club instead of passing it to a separate department to be cleaned. Removing one step in the process without compromising product quality helped reduce costs and enabled the company to ship the finished product to customers one day after finishing rather than two days under the old process.
10 Quick Ideas for Growing Your Business
In addition to cutting costs, you might want to help your business grow. Of course, there are many ways to do this. Here are 10 quick ideas from the Small Business Administration:
1. Open another location.
2. Offer your business as a franchise or similar opportunity. Doing so can result in growth without requiring you to manage a new location.
3. License your product. This can be an effective, low-cost growth medium — particularly if you have a service product or branded product.
4. Form an alliance. One powerful way to expand is to align yourself with a compatible business, possibly through a joint venture.
5. Diversify. Look for multiple streams of income to fill seasonal voids, increase sales and boost profit margins. A few approaches to consider: Sell complementary products or services, become a paid speaker or teach a class.
6. Target other markets.
7. Win a government contract.
8. Merge with, or acquire, another business.
9. Expand globally. Look for a foreign distributor that can carry your product and resell it in its markets. You can locate foreign distributors by scouring your city or state for a foreign company with a U.S. representative.
10. Boost your Internet presence. Make sure prospective customers can find you through an online search engine and one or more social media platforms.
Potential Competitive Advantage
Above all, don’t go about cost cutting alone. When a business owner or senior exec launches a personal, one-time cost-cutting expedition, the results can be fleeting. Employees “hunker down” and wait for the initiative to falter or fade. When your company and its employees embrace the concept of adding and maintaining value to processes over time, the results tend to be more sustainable and, in best cases, even provide your company with a competitive advantage.
This article appeared in Walz Group’s February 13, 2023 issue of The Bottom Line e-newsletter, produced by Checkpoint Marketing.
What is the Value of Your Business?
This article outlines three different ways of valuing a business
New Business Travel Per Diem Rates Announced for 2023
If you or your employees travel for business, keeping up with records, receipts, and reimbursements can be a challenge. The new per diem rates for 2023 have been announced: