Owners of SMEs often face what seems to be endless financial pressures, from rising interest rates to increasing operational costs. It’s only natural that when this happens, the immediate reaction for many is to cut expenses. However, without care, these cuts can lead to unintended consequences that may harm the business in the long run.
In this Insight, we aim to help those facing these pressures adopt a strategic mindset about cost cutting. We also take a look at the benefits of a clear business purpose and explore the interrelationships between various business drivers when cutting costs.
Key takeaways
Cost-cutting can bring instant gratification, but with it, longer-term consequences.
Will the expenses you reduce or remove have an impact employee and client engagement? What about innovation and reputation?
Reducing expenses in a more informed and strategic way reduces these risks.
Clarity of business purpose is at the core of a successful cost-reduction strategy.
The immediate (and understandable) reaction to financial pressures: "tactical" cost-cutting
When faced with more challenging economic and business conditions, the intuitive response for many SME owners is to reduce costs as quickly as possible. This usually involves attempts to identify non-essential expenditures, maybe reducing staff numbers or delaying investments in technology and other infrastructure.
While these measures can provide short-term relief, they may also compromise the longer-term sustainability of growth rates. It can also erode whatever competitive edge your business may enjoy in your market.
Some common short-term cost-cutting measures include:
Reducing marketing and advertising budgets.
Reducing people numbers, reducing work hours, or both.
Cutting down on training and development programs.
Delaying upgrades or maintenance of equipment and technology.
While these actions usually result in instant gratification, they often fail to consider the broader impact on the business's overall performance and sustainability.
The potential pitfalls
There's a lot of "what ifs" when you take expenses out of business. You've probably experienced times when you know with a high degree of certainty the impact of your cost-cutting. Sometimes, you might find implications sneaking up on you.
Here are some examples.
Impact on employee engagement and productivity: Redundancies and reduced work hours directly correlate with a significant decrease in engagement among remaining employees, leading to decreased productivity and increased turnover rates. Research even gives it a name: “survivor syndrome”, where the employees who stay on after a round of retrenchments feel a level of guilt ("why wasn't it me?") and as a result are less motivated to go above and beyond. If you've ever experienced low or falling engagement in your business, you'll know the impact it has on service quality and client satisfaction. It's something to be managed closely.
Compromised client acquisition and retention: Cutting marketing budgets will, by definition, reduce your ability to attract new clients, if even temporarily. You may also see an impact on client retention. The risk is that your competitors will pick up at least some of the clients you miss or lose, which has some obvious longer-term consequences.
Stagnation and lack of innovation: Delaying investments in productive infrastructure (technology and others) hinders your ability to innovate and adapt to changing market conditions. Over time, this can eat into your competitive advantage. You might also see an additional impact on your people, who may take the view they're being asked to do "more with less". It might not be true, but you can see the importance of managing perceptions.
Damage to brand reputation: This can be one overall outcome of the points above.
Indiscriminate cost-cutting can, without a doubt, reduce the quality of client service in a number of ways. In the extreme, your clients may look to alternate providers at your long-term expense.
So, with these potential pitfalls in mind (some of which you may have experienced yourself), what can be done? Is there a better way? We believe there is...
The strategic approach: informed and purpose-driven cost-cutting
To avoid these and other potential pitfalls, it’s important to consider a more strategic approach to cost-cutting. This means, for one thing, understanding the interrelationships between various business drivers and making informed decisions that align with the company's long-term goals and business purpose.
Key elements of strategic cost-cutting:
Clarity of business purpose: Your core vision should guide every decision about cost-cutting opportunities. A clear business purpose provides an excellent framework for evaluating the potential impact of cost reductions on your long-term objectives.
Data-driven decision-making: It’s also critical to leverage data and analytics to understand the short-term and potential long-term implications of cost-cutting measures. This includes analysing historical data and, more importantly, assessing the possible future impact on different areas of the business.
Prioritising value-adding activities: Don’t forget...you don’t want to stifle growth altogether. So, identify and prioritise activities that add the most value to the business. Focus on maintaining, wherever possible, investments in areas that drive growth, such as innovation, client service, and employee development.
Scenario planning: Some simple “what if” exercises can help you evaluate the potential outcomes of different cost-cutting strategies. This helps you anticipate and mitigate unintended consequences. You won’t necessarily get this process 100% right, but it’s still an essential part of your decision-making process.
Continuous improvement: When cutting costs is perceived as a one-off, perhaps knee-jerk reaction, the first word that will pop into some people’s heads is “desperation”. You can avoid this by implementing a culture of continuous improvement where cost-cutting is not a one-time activity but an ongoing, strategic and thoughtful process. This means you need to regularly review and adjust business strategies based on feedback and changing market conditions.
How to implement strategic cost-cutting
Step 1: Define your business purpose and objectives
Before making any cost-cutting decisions, take a deep breath and revisit your business purpose and long-term objectives. This work provides a clear context for evaluating the longer-term impact of potential cost reductions.
Step 2: Conduct a comprehensive evaluation/diagnostic of your business
Take a deep and broad look into your business. Consider your current strengths and evaluate each potential cost-cutting measure in terms of its impact on your ability to do more of what makes your business great. You’ll likely identify a few activities that aren’t adding value in the context of growth, so cutting out those activities could be a way to make immediate savings and reduce pressure on other, more productive expenses.
Step 3: Prioritize cost-cutting opportunities
Many businesses overlook this. Since not all costs are created equal, it’s important to identify whether some expenses can be reduced with minimal impact on the business. In other words, and you’ve probably noticed this is the theme running through this post, don’t simply opt for the obvious, big-dollar expenses as prime candidates for cutting. That can lead to unintended, adverse consequences.
Step 4: Be transparent
Employees, in particular, can become quite nervous when they see you cutting costs left, right and centre. So don’t overlook the need to openly communicate with them about your actions. That includes any bad news about employee numbers and/or working hours. Most people prefer to know exactly what’s going on rather than relying on the rumour mill.
Transparent communication helps in:
Building trust and gaining buy-in even when bad news is involved.
Gathering valuable insights from front-line employees on the potential impact of cost-cutting measures.
Ensuring that everyone understands the reasons behind the decisions.
Step 5: Implement the required measures and monitor progress
Once you've identified and prioritised cost-cutting opportunities, implement them in a way that minimises disruption (as far as possible).
Monitor the impact on:
Financial performance: are the cost reductions translating into improved profitability and cash flow in the way you thought they would?
Employee engagement and productivity: are there any signs of reduced engagement or productivity? If so, what can you do about it?
Client engagement: are there any signs of negative impacts on client experience or engagement? Again, how can you mitigate this risk?
That’s a lot…
It is.
But realistically, in a challenging economic and business environment, SMEs will almost inevitably find themselves dealing with financial pressures. Rather than a knee-jerk response, adopting a strategic approach to cost-cutting is critical to ensure long-term viability and competitiveness with a minimal impact on growth over time.
SMEs can avoid the unintended consequences of tactical cost reductions by understanding the inter-relationships between various business drivers and making informed decisions aligned with a clear business purpose. Ultimately, strategic cost-cutting enables SMEs to navigate financial pressures while maintaining their core commitment to purpose and driving sustainable growth.
What's your approach to cost-cutting?
Slash and burn?
Focused on the big-ticket items?
Perhaps a bit inconsistent?
A conversation with a GrowthCatalyst adviser could be just what you need to create a more strategic plan to minimise damage to your long-term, sustainable and profitable business growth.
Contact us to arrange a face-to-face or virtual conversation.
Alternatively, you can book a time for an initial discussion here.
In other news...
GrowthCatalyst has joined forces with a number of like-minded professionals to form the advisory group Konektis (check us out here). Collectively, the Konektis team provides integrated, multi-disciplinary advice to SMEs to deliver a "one strategy" outcome.
Take the Konektis Pulse Check and receive immediate, actionable ideas to grow your business.
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