Cut costs, cut costs, cut costs…

Find the balance to keep customers happy and optimize long term profits

Article Overview

All it takes is typing “layoffs” in your browser to come across numerous recent articles covering mass job losses. Even after a significant recovery from the unemployment peak a few months ago, people are still losing their jobs as management teams try to protect bottom lines. However, workforce reduction initiatives incur hidden costs that can easily outweigh the immediate benefits. This Harvard Business Review article highlights some of the negative impacts, such as intellectual property loss and accelerated turnover rates. Layoffs also impact revenue generation as customers become “more likely to defect after a company conducts layoffs”. Finally, periods of unemployment can have long-term, negative implications on our peers’ lives. We can and should make better decisions as it relates to human capital and customer experience. The first step is to change our perspective on “costs.”

Scenario: Let’s say you’re a lawyer that charges clients a fixed rate per hour of work (e.g., $300). Your book-of-business is still growing, but you have goals that are expensive to fund (e.g., law office with the best view in town), so you decided to maximize your earnings. The two options below are available to you:

#1-Cutting costs. You live and breathe to save every penny, and people see you pacing around muttering the title of this article (“cut costs, cut costs, cut costs…”). Your best clients just invited you to a dinner, but you’re worried the price of the meal may be a bit too much: $100. You responded to the email with an excuse to not attend and felt good about the extra money saved in your pocket. What you didn’t know is that some of your client’s other guests had just started a new business and are looking for legal services. The introduction would have earned their trust and paved the way for a new account with hundreds of billable hours. And by the way, your email still hasn’t been sent because you downgraded to the cable company’s slowest (and cheapest) package.

#2-Maximizing return on investment (ROI). Now imagine you’re someone who understands there’s little value to doing anything other than what you do best: growing your business. Yes, there’s some waste in your organization, but you understand the trade-offs involved: each hour you spend on the phone negotiating with a supplier or scanning documents is time you cannot invest in growing the business. You thought about the yield of different activities in your life and made some adjustments. You stopped eating a homemade lunch in the office to start having lunch with clients. You also stopped working out by yourself in your apartment (even though you loved the training videos) to join a high-end gym where you work out with prospects. To top it all off, you have lightning fast internet speeds.

As we look at these two scenarios, which one do you think is most likely to lead to the impressive office in the city’s best high-rise?

Sadly, even though it is an easy answer, maximizing ROI falls on the “common sense, not common practice” bucket. Research from the Boston Consulting Group shows that a majority of companies do not track ROI, which leads to management teams making uninformed decisions to improve short-term profitability. Billions of dollars are left on the table every year because managers do not deploy funds to their best use. As it relates to human capital, it translates into thousands of people losing their jobs.

An easy step organizations can take to assess the impact of their expenses is a consensus ranking exercise. Gather representatives from your internal teams and stakeholder groups to rank expenses based on relative business value (i.e., how much you expect one expense to contribute to business growth compared to another: more, less, or the same). By keeping it high level, labor costs, software licenses, and all other expenses can be compared and ranked. In the end, you should have a comprehensive list that lets you know what could be cut if needed while ensuring that it doesn’t add additional risks (e.g., compromised data) or burden revenue generators with back-office work (e.g., reporting).

Whether known or not, all expenses have an ROI (some are great and others not as much). By taking steps to shift away from a cost-cutting to an ROI-maximizing mindset, you will be better equipped to protect your business in the long run. The extra benefits include happier clients, healthier teammates, and a more prosperous community.

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