It takes an organizational village to keep costs in line

Most business owners and managers feel near-constant pressure to keep a lid on expenses during both good times and bad. When the economy is jittery, however, there is often a knee-jerk reaction to trot out the cost-cutting long knives and wield them aggressively and indiscriminately.

That can be a big mistake, warns Derek Martin, a Princeton, New Jersey-based management consultant specializing in business performance improvement. In their rush to slash operating and overhead expenses and shore up cash, companies risk destroying the very qualities that give their businesses value.

Cost management—more than just cost-cutting—is important no matter what the economic environment, but it must be approached in a strategic manner rather than simply through broad-based slicing and dicing. "A well-conceived cost-reduction strategy enables companies to capture maximum value from direct savings and to foster a culture of efficiency while maintaining company value," Martin says.

That's the approach Owen Connaughton, founder and President of Creative Mobile Interiors, has taken. The Grove City, Ohio-based motor coach modifier has four plants totaling 21,000 square feet and has doubled or nearly doubled its sales every year since 1999.

Making cost management part of a company’s strategic thinking is "one of the most valuable things you can do in business,” Connaughton says. "It should always be done, regardless of external economic conditions. There is never a time for waste." Paying attention to costs and vendor pricing when times are flush "will make you more financially stable and better equipped to handle poor economic conditions" when they arise, he adds.

In order to be most effective and preserve company value, strategic cost management must include three essential ingredients, Martin says: vision, communication and managing work loads.

Vision is required to maintain balance between the need to achieve operational efficiency and the need to build and maintain strategic competencies. Indiscriminate cuts in key areas can weaken core competencies and hamstring competitiveness.

Achieving that balance can be a challenge, admits Keith Thompson, founder and president of Amherst, New Hampshire-based Swiss Knife Shop, an e-commerce business. "Strategic cost management is crucial in a time when shipping prices are rising, as they have been recently,” he says. "We don’t want to raise prices for our customers, so we have to look inward and find ways to shave costs. You want to cut any fat, but you have to stop short of hitting muscle. It’s a delicate balancing act."

One of the most effective strategies Swiss Knife Shop has found for reducing expenses is constantly renegotiating deals with vendors and playing competing vendors off against each other in areas such as shipping, credit card processing and packaging materials. In order to make the most of this strategy, however, companies must avoid falling into the trap of complacency, Thompson warns.

Swiss Knife Shop ships primarily through UPS. As the business has grown, the shipper has offered it better rates. "But our business continues to grow, and I have to remember to keep going back and asking them to look at those rates again," Thompson says. "I also touch base with other shippers from time to time to see what they’re offering, and I don’t hesitate to use that information to my company’s advantage."

Communication is important to avoid uncertainty about the objectives of cost-cutting initiatives that might arise among a company's employees and stymie the effort’s positive impact, Martin notes. The right approach to communication can help assuage employees' concerns, get them behind the effort and help inculcate a culture of strategic cost management within the company.

"The bottom line of the company is what helps everyone stay employed," says Connaughton. "I challenge each employee to eliminate waste, save time and labor, and decrease parts on every project. I share my cost-management goals with the managers of each department and let them develop ways to implement them in their divisions."

Companies that lack a strategic approach to cost management often try to reduce costs by cutting the work force without addressing the work load itself, which is a mistake. "Payroll costs go down in the short term, but the same amount of work must be completed by fewer people," Martin points out. As a result, profits and performance can spiral downward.

Thomspon finds strategic use of temporary workers to be an effective tool in managing work load. His business is seasonal, spiking during the fourth quarter and around holidays such as Father’s Day, and he uses temp workers to help deal with the increased demand.

While temps are expensive, they give Swiss Knife Shop the flexibility to deal with changing market conditions without taking on the added salary and benefits expense of full-time workers. They also provide an opportunity for the company to evaluate temps for full-time positions. Four of the company's current employees started out as temps, Thompson notes.

At Creative Mobile Interiors, a "just-in-time" manufacturing system not only helps the company manage work loads more efficiently, it has cut inventory costs and improved tracking of excess inventory, reducing the need for future orders, Connaughton says.

Still, many companies find there is no avoiding tweaks to the labor force under certain conditions. "I believe it is always necessary to examine your processes and eliminate unnecessary labor from any task," Connaughton says. "Labor is the highest-priced item in most businesses."

Strategic cost management is something every business should be thinking about, and they should start by building a solid organizational foundation that promotes a culture of efficiency, Martin says. Done right, it can be implemented with no ill effects on employee morale. "As long as your employees feel important to the company, take pride in their achievements and feel that they also benefit from the financial health of the company, this will not be an issue," Connaughton says.