What is really cost cutting

A company goes through some good times and some bad times. And sometimes it even has to march through the Death Valley (expression from Andy Grove). 

Cost cutting is something which usually comes up during the bad times and is seen as a necessary evil the company has to go through. It's a fuzzy term for a lot of different things generally perceived as a negative thing. So let's get to the bottom of it.

A company can be seen as operating at several levels:

Sustainability is about who we are, Strategy is about what we do and Tactics, is about how we do things. Below the tactical level are the operations, which is how the business is conducted. Cost is a dimension along all of these. So, when we're talking about cost cutting, we need to know what dimensions are we talking about.

1. The Sustainability type of cost cutting is a company changing endeavor, sometimes part of a Death Valley journey. It can be in the area of 70-80% and it has something to do with changing the actual identity of the company. It can occur as a result of an external shock, when something has changed in the business environment and radical measures are required for the organization to survive in the long term. A new company with a new identity will emerge as a result.

2. The Strategic type is about making changes at company-wide level which result in a cost reduction. Examples: outsourcing, relocation, centralization of functions, digitalization, etc. These are more often called "initiatives" or "projects", are the result of an idea of how to get better at something and become a targeted and focused measure with clear goals and milestones.

3. The Tactical type of cost cutting is the one actually called "cost cutting" and it involves things like personnel reductions, lowered travel expenses, cuts on consultancy expenditures, playing with the thermostat and the like. This one has a generally negative connotation and is either a defensive measure as a result of bad times or a program for turning the company culture towards a more cost-savvy one. Usually not targeted, but left to the individual or department level to come up with good ideas.

When we go beyond the tactical level and talk operations, we are talking daily business and individual decision making. Inevitably this is about culture: values, education and cost awareness. 

Among the three, results vary. If the company lives to tell the story, the program type 1 succeeded. Strategic-level initiatives usually work, the idea about how to do it is already there and plans are laid out of what should be done. Things get more complicated and prone to failure at the tactical level. Costs come back after a while or are not reduced in the first place. The reasons can be many, but two of them I think stand out.

One is not understanding the level you are talking about and implementing cost cutting programs at the operational level when strategic or even sustainability type of programs are the ones actually needed. 

The other one is the implementation approach. If, let's say it's clear you are working at a tactical / operational level, one question should be what are the costs we could avoid altogether if we would do things differently? Or how can we increase the cost flexibility of our structures such that costs will be reduced naturally during bad times? For example, if you decide to increase the share of temporary to fixed employees, what kind of capabilities the company needs to put in place? Perhaps building e-learning tools, work instructions and internal training programs that will bring temporary employees up to speed in no time. 

When it comes to cost cutting, it's paramount to be clear about the dimension is it going to be done at, what levers will be employed and which capabilities you need to build to support it. Cost cutting is not just about about cutting costs.

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