The Dangers of Taking Cost-Cutting Too Far!

Cutting corners is nothing new, yet many companies continue to try and save money at any cost, without really considering the risk.

The most recent example of the impact of cost-cutting were the flight delays with BA; an IT glitch which the GMB Union claims was a result of outsourcing the IT function to India. Another recent event which highlighted the danger of too much cost-cutting, was the global cyber-attack which impacted 200,000+ victims in over 150 countries. In the UK, the NHS became the worst victim. Hospitals and GP surgeries in England and Scotland were among at least 16 health service organisations hit. Surgeries in parts of England were forced to turn away patients and cancel appointments, after they were infected with the ransomware. People in affected areas were being advised to seek medical care only in emergencies. This could have been prevented if certain precautionary measures were taken at the time and issues given sufficient priority.

So, in what other ways can too much cost-cutting have damaging effects on your company?

Ending training – It is extremely easy to calculate the cost of training, but what many managers and senior members fail to gauge, is the return on those investments. If employees are not given training to do their roles properly, in areas such as health & safety, it will only have a detrimental impact on the company. The training needs to be interactive and hands-on, in order to create a step change in improvement.

Do not halt performance improvement projects – It can be tempting to abandon key projects in favour of shorter, cheaper or less challenging alternatives in times of austerity. However, it can be extremely difficult to obtain business benefits from lower-cost replacements. The company risks losing further revenue/profit/customers if continuous improvement is not driven.

The key thing if you are going to use external support, is to hold those you engage to account if they do not deliver what they sign up to at the outset. Guarantees should be put in place so any investment made, generates the returns promised.

It’s everyone’s problem – When looking for new ways to cut costs, some companies replace suppliers with less expensive, and at times, less extensive providers. Though this may seem like a good idea, particularly if the decrease in quality and efficiency has no immediate consequence, this type of switch runs the risk of hiring a supplier who is also trying to cut corners. In many circumstances, the suppliers themselves are trying to keep costs down and as such, will hire less experienced staff, use tools and programmes that do not achieve what you as a company want, and naturally, this will lead to huge financial and business problems down the road.

Less-expensive partners mean inferior services, which likely mean less business value and the wrong type of company culture switch. Assess internal business risks that could result from a change of supplier, and do not forget to factor in the cost of switching, such as penalties from the old contracts.

Don’t have tunnel vision – Cost-cutting individuals, who do not know what and how to save money, often approach the situation by focusing on one area or single business initiative/department, instead of evaluating the business as a whole. It is extremely important to assess the business value and the business risk as they affect the entire company, and allow leaders to focus on the potential negative effects of proposed cost optimisation initiatives. Consider consequences such as damage to the brand, negative client perception, loss of critical resources or a sacrifice in terms of competitive positions.

In closing, when looking at your cost cutting and brainstorming ideas on saving money, remember to consider the long-term effect of your actions. It’s a good idea to track and measure your cost saving strategies to ensure they are not negatively impacting your business over time. Remember, what looks good on paper can sometimes have a negative impact on your sales and income.