When Cutting Costs, Don’t Lose Sight of Long-Term Organizational Health
After three years of adapting to disrupted business conditions due to the pandemic, the aftermath of inflation and fears of recession have leaders scrambling to get budgets in line with slower revenue growth. Riddled with the anxiety of making the wrong choices and having to deliver tough news, leaders are often prone to making short-sighted decisions when cutting costs. And when it comes to sustaining the intended outcomes of cut costs, most organizations are abysmal. Rather than grasping at straws or doing what seems “least painful,” these are the turbulent times when leaders must double down on protecting the long-term aspirations and culture of their organization. If you’re facing the need to tighten your belt, the authors present several ways to trim costs — without sacrificing the long-term health of the company.
As 2023 gets underway, fears of an economic turndown loom at many companies. The tech sector continues to announce layoffs, and many companies are battening down the hatches in anticipation of challenging times. Some companies are putting the brakes on capital investments in 2023, while others are cutting into travel budgets, hiring and salary increases, and even some employee benefits.
After three years of adapting to disrupted business conditions due to the pandemic, the aftermath of inflation and fears of recession have leaders scrambling to get budgets in line with slower revenue growth. Riddled with the anxiety of making the wrong choices and having to deliver tough news, leaders are often prone to making short-sighted decisions when cutting costs. And when it comes to sustaining the intended outcomes of cut costs, most organizations are abysmal. According to one study, only 43% of companies actually achieve the cost reductions they reach for in the first year, and only 11% can sustain the prudent behaviors into year three. The ultimate failure comes from taking their eyes off the future. For example, only 9% of companies create enough capacity to take on growth and innovation to support their long-term aspirations.
Rather than grasping at straws or doing what seems “least painful,” leaders must double down on protecting the long-term aspirations and culture of their organization. If you’re facing the need to tighten your belt, here are some important ways we’ve seen leaders trim costs — without sacrificing the long-term health of the company.
Just because growth has not materialized, or external factors are contributing to reduced revenues and higher costs, doesn’t mean your strategy isn’t sound. Leaders who jump into cost cutting without first reaffirming (and adjusting if necessary) the organization’s strategy are likely to send their companies into whiplash. If your long-term strategy is still sound in contrast to current performance and results, it’s time to lean into that strategy and figure out how to make short-term reductions that affirm long-term goals, rather than abandon them.
Leaders who effectively balance short-term reductions and longer-term aspirations find themselves asking questions such as, “Which of these costs are more wed to our past performance than future goals?” They lead the work of reducing expenses by making sure the organization has great clarity on their intended competitive advantage and the capabilities it will take to lead to success in the marketplace. Targets for cost cutting become part of strategy achievement, and in fact can escalate an organization’s realization of its strategy if it’s viewed as a continuous part of operating the company.
For example, one of our client’s revenue recently dropped 25% in the span of 18 months. Faced with drastic cost cutting, they recommitted to a strategy that had them moving from predominantly one business sector (85% of their revenue) to a more distributed and balanced portfolio across three sectors longer-term.
