When CFOs are charged with leading cost-cutting initiatives, by necessity they find themselves navigating between the certainty of change and the human tendency defer short-term pain at the risk of much more drastic consequences in the future.

There is nothing that can be done to completely avoid that fate, as it is common to all change agents with a mandate to reduce costs. However, one way to at least minimize internal resistance to the program is to explicitly target non-staff costs.

When taking that route, make sure colleagues, middle management, and staff understand that the goal of the cost-cutting initiative is cutting the fat generally versus cutting jobs specifically. Tell that that the greater the success at the former, the greater the certainty that the latter will be pared. Then the stage will be set for a successful cost-cutting initiative.

Plan of Attack

Finance can, of course, be a complex endeavor. But when it comes to cutting costs without eliminating jobs that company growth may require, failure to adhere to some straightforward principles is what trips up many companies.

David Johnson

A solid plan for a cost-cutting initiative should include the following elements:

Goals: The change agent must have answers for key questions. Is the cost-cutting push an internal decision, or is management’s hand forced by lenders or shareholders? Is the mandate a nominal value or a percentage of revenue? Are certain functional areas deemed of greater or lesser strategic significance? Are the targeted savings to be net of one-time expenses? What is the timing of the cuts?

Structure: Minutely understanding the company’s cost structure is necessary for driving lasting change. In this realm, the more granular the detail, the better.

Perspective: Expenses that seem like waste to one person can seem essential to another. Knowing not only what is spent and where, but why, is essential.

Alignment: Successful CFOs know that a laser focus on numbers while disregarding relationships inside and outside the company is a route to failure. Run a transparent process. Discuss preliminary findings with fellow management-team members, share your thoughts and impressions, invite suggestions, and welcome debate. Successful alignment features broad consensus on the areas that should be most and least impacted, and why.

Implementation: Perhaps the simplest yet most overlooked principle is that a good plan must be actionable. Not only must cost-saving opportunities be identified, but a sound plan for taking the steps necessary to achieve the savings must be developed. Otherwise, the entire effort is useless.

Where to Find Inefficiency

While every company is unique and all cost-structure elements deserve scrutiny, a number of prominent “reservoirs of inefficiency” are common across industries:

Expense Type Description Savings Potential
Rent (office) Companies often lease excess office space in anticipation of future growth. Should that anticipated growth fail to appear, a company can easily find itself with considerably more space than necessary. This can be especially egregious in companies with multiple locations. High
Rent (equipment) Just as companies often wind up with excess space, they can also find themselves with excess equipment. Whether as seemingly innocuous as a high ratio of printers to office staff or as egregious as more leased trucks than staff at a satellite office, this is an area that’s always worthy of careful investigation. High
Vendor Pricing Too often, cost-saving initiatives take gross margin as a given, and address only operating expenses. This is a mistake. A careful review of spend by vendor can identify opportunities to negotiate volume-based discounts that yield substantial savings. High
Travel & Entertainment Poorly designed or policed (or both) expense-reimbursement policies can result in exploding T&E spend. Clear policies, strictly enforced, can generate noteworthy savings. Medium
IT (general) A regular audit of IT spend tends to identify areas of inefficiency. These items can be as simple as having too many landlines, or as vexing as determining the correct number of licenses for a reporting tool. Medium

Conclusion

It’s often possible to achieve noteworthy savings without reducing headcount. Indeed, for moderately sized cost-cutting targets, that should be the goal, as it fosters greater organization-wide support.

Change is difficult, and necessary change no less so. However, a CFO’s approach to a cost-cutting initiative will determine whether he or she has been blessed with an opportunity to shine or cursed with a thankless task.

David Johnson is founder and managing partner of Abraxas Group, a boutique advisory firm to middle-market companies in transition.

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3 responses to “How to Cut the Fat Without Cutting Staff”

  1. The statement “Poorly designed or policed (or both) expense-reimbursement policies can result in exploding T&E spend” stood out to me. This actually applies to numerous other expenditures. One thing that often happens is a budget is created and then management and employees fail to use it before making a decision to make an expenditure. I wrote the blog http://aimcfo.com/why-you-never-hit-budget/ that discusses this issue.

  2. Addressing the usual suspects won’t impact the earnings. Politically, CFOs are rarely in a position to do anything about cost reduction outside their own organization. Sure, they can carry the CEO’s message, but in the end, CFOs are in no position to force anything to happen. Attacking all the usual suspects, those mentioned in the article, will have negligible impact on earnings. Also, the reductions in these areas are rarely sustainable. We call this approach “harvesting the low hanging fruit.” It’s noble, but of little value to investors. CFOs are much better at dealing with after the fact results than causing results.

  3. Vendor pricing is an often-overlooked opportunity. We continually hear that we must “reduce our price/offer incentives” to customers to remain competitive. Unfortunately, we usually forget that we, too, are customers. And we can (and should!) exert the same pressure.

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