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Three days of predictions, insights, and advice from leaders in finance, sales, HR, supply chain and more
Register now here
By Nirdesh Karnawat, Global Finance Director, Reflectives Solutions at Avery Dennison
Traditionally, finance professionals use fixed costs to model the impact of increased sales or productivity (the “variables”) on overall financial performance. Technically, fixed costs should not change within the relevant period and more so, in the short term. However, in any downturn, we see businesses challenging the essence of this assumption. Any crisis raises the question of whether costs can be truly fixed.
A recession is a great excuse to trim the fat that always creeps in during times of plenty. However, businesses that use a lens of value-add and customer service are much better positioned to determine what costs can be cut without harming the business.
Based on my experiences and observations of various organizations, I would like to share a few tips while challenging and reducing these fixed costs.
There are several expense categories that should be investigated further when thinking about reducing costs:
These are typically one of the largest expenses, and reduction here to match associated revenue can result in significant savings.
Since cutting payrolls and benefits is a sensitive decision, organizations need to consider several alternatives such as
Each of these alternatives has its own benefits and drawbacks. Also, they can be used in a combination. The main thing is that employees should feel that they still matter to the company and haven’t just been abandoned or forgotten about.
If neither of these alternatives is possible, organizations have to think carefully about permanent reduction in workforce. When having to make laying off decisions, several things should be kept in mind:
Building a good relationship with your suppliers should be an axiom to live by - especially when you are all in the same boat during a recession. However, there are also several recommendations that could be followed:
Continued technological advances have made it possible to outsource a wide range of functions including HR, customer service, and data analytics (much beyond the traditional outsourced functions of IT and Finance).
Outsourcing should not be overlooked. This can easily turn a fixed cost into a variable one.
Cost of operations and value creation are also an important part of the cost reduction strategy. There are a few recommendations that can be considered:
This is the most important piece of cost management. I know of organizations where employees took ownership and pledged to reduce cost at their respective levels irrespective of their function. They responded as if they were running their own business. By approaching it from this grassroots level, costs were challenged at each step.
Is the organization culturally prepared and evolved to make a long-lasting positive impact on the business while pursuing these cost reduction measures? How can we develop an inclusive culture that shifts focus on cost optimization mindset at an individual level instead of just at the executive level?
The realization that every single employee controls some element of cost is the first step in creating that mindset. Organizations can implement programs around building this mindset and embedding it deep within the organization. I recall an instance where all the delegates to a big sales conference were asked to bring their own notebooks/pens. That single request saved the company thousands of dollars due to the differential rates the hotel was offering.
Even when focusing on extreme cost reductions, organizations need to relentlessly focus on growing and gaining market share, ring-fencing their strategic investment and keeping their people motivated.
I am sure organizations that look at fixed costs from this perspective will be more resilient and emerge stronger.
Note: The views and opinions expressed in this article are those of the author and do not represent those of the people or organization that the author may or may not be associated with in professional or personal capacity, unless explicitly stated.
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