Strategic Cost-Cutting: A Scalpel Beats a Machete

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Making the right cuts doesn't mean slashing everything

It's a rare company that isn't trying to cut costs these days. However, slashing a fixed percentage in categories across the board could do your company more harm than good, according to innovation expert Ric Merrifield, author of Rethink: A Business Manifesto for Cutting Costs and Boosting Innovation. Instead of slashing 10% of everything from payroll to marketing to quality control, a better approach is to look at the areas that are not returning adequately on the investment of time or resources and cutting those.

Miles Lee, president of Alliance Cost Containment, a Louisville, Kentucky cost-reduction consultancy, agrees. Lee's research has found that every dollar a business saves is equal to five dollars in new revenue, based on the effort it takes to bring in that revenue. When Lee works with companies to help them identify cost-cutting areas, he typically looks at broad sections of the business by function. He and Merrifield weighed in on some important cost-cutting actions:

• Negotiating. Regularly review your supplier, insurance, lease and other ongoing expenses. It can pay to compare what you're paying to what is being offered in the marketplace, says Lee, as costs can creep up over time. Don't be afraid to ask for a reduction in what you're paying or to change suppliers. In the case of office leases, don't opt for posh space unless you really need it. When renegotiating your lease, be ready to document the prevailing market value, especially in areas where rents are on the decline.
• Bundling. In everything from telecommunication services to insurance, buying a suite of products or services from a company can yield significant savings. For example, Lee suggests bundling all service contracts and procuring them through a single-service insurance company. 'You will save 15% and have a single point of contact for any issues,' he says. Some companies have reported saving as much as half by opting for a bundle containing phone, high-speed Internet and cable television services.
• Greening. Being more energy conscious can yield significant savings. Asking employees not to print documents when it's not necessary and switching all printers to two-sided functions can save on paper and ink costs. According to Energy Star, a government-sponsored energy initiative, if every homeowner in the United States replaced one incandescent light bulb with a compact fluorescent light bulb (CFL), the energy savings would total $700 million annually. Connecting electronic equipment to power strips that are shut down at night, monitoring plumbing for leaks and conducting regular audits of utility bills can all yield important savings. Energy Star offers a number of resources for small-to-midsize businesses.
• Outsourcing. Some activities just don't contribute to a company's core activities, but are still important for the company to operate. In those cases, Merrifield suggests outsourcing. 'About 85%, really, of the work that goes on in an organization isn't the high-value work, which doesn't mean you get rid of [it]; you just handle it differently,' he says. To determine if outsourcing makes sense, compare the direct and indirect costs your business will incur—including staff time, resources, office space—versus what the outsourcing provider will cost. Don't give up services that differentiate your business, but consider those activities that don't directly affect your customer satisfaction or bottom line. For example, Merrifield says that one area it frequently makes sense to outsource is payroll.

There are cost-cutting opportunities in virtually every area of your business, says Lee. The key is to look at every activity with an eye toward how it affects your standing in the marketplace. If it isn't directly related to your core business, look for ways to cut back the resources you devote to it.