Making Cuts without Incurring Losses in the Face of the Downturn
There are a lot of options when it comes to becoming more cost-efficient in the wake of the drop in oil prices.
But studies show that companies that take progressive action, a combination of strategic moves implemented across the company, emerge from recessionary conditions stronger than before. Their gains are immediate, more substantial, and longer-lasting than their non-progressive counterparts. Unfortunately, there’s no sure fire formula to follow. It requires consideration of the pros and cons of cuts across departments to determine what type of spending should get the worst of the axe:
Potential Cut One: Payroll
Why it’s Tempting: For most small to medium-sized businesses, it’s the largest expense on the books and cuts result in an immediate boost in cash flow.
Things to Consider before Wielding the Axe: Statistics show that most companies will spend 20% of an employee’s annual salary replacing them. This expense could be especially large if you have highly skilled, technical professionals as a part of your team. Whatever immediate savings are gained by eliminating their position, you’ll spend that (and then some) rehiring that skill set once the market’s recovered.
Progressive Action to Take: If a cut to payroll is absolutely necessary to sustainability, consider cross-training members of your team. If the most skilled members of the team are short on specialized work, they may welcome the opportunity to do something new and remain productive, even if it’s not in a technical capacity.
Potential Cut Two: The Marketing Budget
Why it’s Tempting: Marketing. Advertising. Relationship-building. Branding. It all takes time and repetition to work. When budgets are tight, it’s hard to justify spending on anything that doesn’t provide immediate results. It’s also a victimless crime, so-to-speak: pulling numbers out of a spreadsheet is a lot easier than having to terminate someone.
Things to Consider before Wielding the Axe: Marketing generates leads. No business can survive without it, in one form or another.
Think of the time and money you’ve invested in trying to keep your star customers, find new ones, and build your brand. Deep cuts in the marketing budget means spending the first six months of the recovery trying to re-gain previously acquired ground. Why pay for the same thing twice?
Progressive Action to Take: Establish a reasonable amount that you’re willing to pay, per customer, to acquire them through marketing and advertising. Using a cost-per-prospect system makes spotting ineffective methods of marketing and advertising simple.
The key word here is reasonable. High-quality, direct, and intimate the interaction (think face-to-face sales and marketing, magazines heavy on editorial, direct mail), costs more per contact. Impersonal communications that are intended for a mass audience (email blasts, newspaper advertising, web banners) should be on the lower end of the scale.
Trade shows are another option that provide the best of both worlds; high-quality, personal interaction on a mass scale. It’s the lowest cost-per-prospect ratio of any marketing medium. So it’s no wonder that sales cycles launched from trade show leads cost less to close and close faster than by traditional methods.
Potential Cut Three: Research and Development
Why it’s Tempting: R&D focuses on long-term improvement and looking at the big picture can seem frivolous when you’re trying to fight off immediate threats.
Things to Consider before Wielding the Axe: Halliburton. The company has invested in upgrades to equipment and improved techniques. As a result, they claim to be able to cut a typical well’s capital spending by a quarter, maintenance by half, labor by a third, and development time by more than half, compared with the previous approach. Once the market recovers, they’ll have an immediate, substantial lead on their competitors and permanently improved model that will continually sharpen their competitive edge.
Increased efficiency in any organization not only leads to better customer service, but the ability to compete fiercely on price without compromising profit margins.
Progressive Action to Take: Establish what you consider to be a reasonable payback period and a reasonable return on investment when it comes to R&D spending. Keeping in mind of course that benefits during the downturn will most likely be modest, but it’s worth it to look ahead and keep your eye on the prize. “In the longer term, underinvestment reduces future production,” Nawaf Al-Sabath, CEO of the Kuwait Foreign Petroleum Exploration Company said in a recent conference in Houston. “What we’re going through is a business cycle; it’s not oil Armageddon.”
Evaluation and an educated combination of cuts and investments across all of these variables will help mitigate risk and help any professional defend their business against a tough market.
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