It has long been a common practice for companies to make reactive cost cuts during an economic downturn. But while these emergency measures can keep a business running through unforeseen events like the Covid-19 pandemic, they’re like using a bucket to empty water out of a sinking boat: it might keep you afloat for a little while, but unless you fix the underlying problem (the hole in your boat), the value won’t last long.
Instead, business owners and finance leaders should be constantly looking for proactive ways to optimize costs by cutting wasteful spending and using those funds for true value-add activities.
What does it mean to cut costs?
Cost cutting is when a company takes actions to reduce business expenses and boost profits. This happens during tough financial times or economic downturns, and can even be a part of a long-term business strategy to address future profitability concerns
However, it’s important for businesses to find opportunities for business expense reduction that support (and don’t compromise) other priorities:
- Maintaining quality standards – Customers won’t decrease their expectations just because the business needs to cut costs. It’s crucial to maintain high quality in goods or services offered, both to retain current customers and to remain competitive in the market.
- Maximizing profit and productivity – When done properly, cost cutting has a direct impact on the bottom line. Businesses must ensure they choose the right costs to reduce, however, to avoid negative impacts on long-term profitability and the productivity of the team.
- Expanding skills and innovation – Cutting costs can be hard on a team, but it can also present new opportunities to expand skill sets and innovate. Leaders and employees should work together to find new ways of doing things with less wasteful spending.
Why is cutting costs beneficial?
Cutting costs is a normal part of business operations, especially when an organization faces difficult financial times, internally or externally. Cost cutting can be beneficial in a number of ways:
Increasing profit margin
The most obvious benefit of cost-cutting measures is that they help organizations by directly improving margins. Reducing business expenses such as overhead costs, production costs, or operational inefficiencies means that for every dollar of revenue generated, a higher percentage can be retained as profit.
Stabilizing cash flow
Issues with cash can signal the beginning of the end, with 82% of small businesses failing due to cash flow problems.When expenses are carefully managed and optimized, the company can ensure that its revenue streams are not depleted by excessive costs – stability that provides financial security, improves liquidity and ensures the business can meet its financial obligations even during tough economic conditions.
Creating opportunities for future growth
When financial resources are freed up, those savings can be strategically reinvested in the business and used for long-term growth initiatives such as expanding product lines, entering new markets, or investing in research and development.
Cost-cutting initiatives require businesses to take a long, hard look at both expenses and revenue-generating activities. This analysis enables companies to identify areas where they can increase revenue while minimizing costs, whether that be high-margin products or services, optimized pricing strategies, or more profitable customer segments to target.
Outsourcing and efficiency
Cost reduction creates an opportunity to outsource non-core business tasks to specialized third-party vendors, helping companies to streamline operations, reduce internal overhead costs and leverage the expertise of external providers.
How can you cut costs without cutting staff?
For businesses, reducing costs while maintaining quality products, high output and a fair workload for employees can be a difficult challenge. Small businesses, in particular, may struggle to achieve the desired impact without layoffs. However, there are many cost-cutting measures that businesses can implement before having to resort to cutting staff. It's important to weigh the pros and cons, but there are definitely ways to optimize business costs without sacrificing your team.
1) Reduce excessive service levels
The necessity, frequency and quality of the services and tasks being performed by your staff should be analyzed before cutting any jobs. It’s highly possible that there are inefficiencies within the team and their assigned duties that haven’t been spotted yet; for instance, maybe someone is running a daily report that could be done weekly or not at all. Determine which reports or services are still required and eliminate the ones that are redundant or no longer useful.
For the services that are still needed on the team, help employees to prioritize tasks based on what is core to the business and what is “nice to have”. For any third-party service providers, reevaluate your business needs and try to negotiate discounts or explore cost-effective alternatives.
2) Collaborate with your IT department to review software contracts, vendors and processes
With the average company using 130 SaaS tools (according to internal Sastrify data), IT spend has the potential to quickly spin out of control. Finance teams and IT leaders can work together to digitize IT processes and uncover areas for cost optimization with their subscription services.
Here are six ways to dig into your IT stack and get SaaS costs under control:
- Review your SaaS stack to understand top costs
- Use the 80/20 rule and look at the 20% of your tools with the highest cost for optimization opportunities
- Talk to stakeholders to uncover which tools are “must-have”
- Look at tools with usage-based pricing and consider scaling down usage versus dropping the tool altogether
- Eliminate wasteful spending by finding and removing unused licenses, consolidating vendors or looking for cheaper alternatives
- When negotiating contracts, remember to compare prices of different software vendors and utilize renewal discussions to ask for better terms
Your IT, finance, and procurement teams don’t have to handle the huge topic of SaaS procurement without support. Modern SaaS procurement platforms give complete visibility into SaaS usage and spending, enabling companies to optimize their software stack, save time, ensure compliance and – of course – save money.
3) Embrace virtual technology and remote work
The Covid-19 pandemic changed how companies work, with many moving toward fully remote or hybrid work. Before the pandemic, 30% of employees worked remotely at least sometimes; since Covid-19, that number jumped to 48%.
One great benefit of this shift is that the tools on the market to support remote work improved drastically. Popular virtual communication tools like Microsoft Teams, Zoom, RingCentral MVP and Google Meet have simplified virtual meetings and document collaboration.
Using virtual technology can aid with cost cutting as it can help businesses automate processes, minimize travel expenses, optimize employee perks and eliminate physical space in an office (or downsize current unused space to a coworking space).
4) Upskill your current team
Depending on the company, labor costs can make up as much as 70% of total business costs. But layoffs are not the only way to find cost savings among your workforce. Upskilling your current employees can reduce business costs in two main ways:
- Provides opportunities for them to learn new skills or improve their existing ones, thereby increasing the available skill set of your workforce and increasing productivity
- Avoiding unnecessary expenses related to hiring and training new workers
Research shows that organizations who chose to upskill rather than replace employees can save an average of 70 to 92%. Upskilling can come in many forms, from low-cost online courses to in-house training and peer-to-peer sessions.
Consider how you can improve your employees' skill sets to enhance their productivity, foster employee engagement and contribute to a more profitable business model.
5) Narrow your business focus
Trying to do everything usually leads to being great at nothing. Instead, limiting the types and scope of your services and projects you accept will lead to higher productivity and higher quality of work.
If a project comes up that falls outside your scope or that you don’t have time for, consider utilizing subcontracting. This can help maximize your total capacity and increase revenue without adding to your variable costs.
Budgeting and trimming financial expenditures is all about maximizing value for money, so do some deeper analysis to uncover which expenses generate the most value – those are the ones to keep.
6) Outsource and focus on what you do best
When you narrow your business focus, you may uncover areas that are outside your core, value-creating operations that could be handed off to someone external. Outsourcing is the practice of hiring a third party to perform services rather than handling them in-house.
Businesses leverage outsourcing to limit internal employee expenses and focus on core activities. Some functions like HR, recruitment, accounting, IT, and customer service can be handed over to specialized outsourcing firms, who can take on all or part of the function.
For project-based tasks – for instance, building marketing materials or developing specific business solutions – organisations can leverage the gig economy by hiring freelancers or consultants. This enables the team to scale operations up and down on demand, without needing to increase full-time employees. Depending on business needs, however, businesses must carefully structure these relationships to ensure they continue to comply with data security standards like SOC 2 and GDPR.
One of the most high-impact areas to outsource and cut costs is IT. Companies are outsourcing the management of SaaS vendors and contracts to Sastrify and achieving savings of up to 35% on software and up to 15X ROI.
Optimizing business costs without significant disruption
Companies might come to the decision to cut costs for countless reasons, whether to improve profitability, stabilize cash flow or enable future business expansion. But although this is no small feat and the task may seem daunting, it is possible to cut costs with little disruption to the organization.
Before the implementation of any cost cutting initiatives, consider which measures will 1) have the highest possibility of succeeding, and 2) will achieve the degree of cost reduction required. By the end of the exercise, the hope is that you will have freed up funds to invest in areas that add true value to your organization.