Sustainable Cost Reduction

Sustainable Cost Reduction

Being able to reduce costs on a long-term basis is a goal of all business leaders. Where reduction is caused through growing competitor power, economic changes, or any manner of items that impact profit, the need is to deal with the costs NOW. The urgency will result in measures that attack obvious costs—but when the urgency abates, what then?

To keep cost reduction embedded in the firm, the use of culture is required to reinforce the benefits of the action.

Consider the decision by a firm to reduce travel costs. The firm has decided that meetings must still occur, but they will now be conducted through video conferencing. This eliminates the pleasures that come with face-to-face transactions and introduces some difficulties through the loss of full visualization of body language. When the decision is uni-dimensional, focusing only on cost reduction, there is no reinforcement that the gain will help the business to achieve its longer-term goals. The pain from the loss of the face-to-face interactions has not been balanced by other gains that have been made.

Contrast this with the situation where the change to video conferencing is initiated under an imperative of continuous improvement. It is no longer a tactic to reduce travel costs; it is now an improvement in time and priority management. The reinforcement is on a series of levels, support through financial budgets, through continuous improvement measures and as a personal win (where the costs would be reduced on the basis that time in a car or airplane is less productive than in the office, or in being at home with loved ones). Initially, the problems under both systems are the same. The lack of face-to-face contact clouds messages. But for the firm that makes the decision under the value of continuous improvement, this problem is recognized as a temporary issue that will be addressed like any item needing improvement.

Costs can and must be reduced in short notice, but that does not mean that actions should be reactive. Fast actions can be taken that will result in long-term gains, when the reductions are seen to be in line with the firm’s strategy and embedded through its culture.

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