Cost-Cutting Ideas for Now That Won’t Impair Clients Later

Thriftiness is in, and CPA firms can help clients save. But not just any savings: You want to bring ideas to your clients that can help them reduce costs now while preserving value, measures that will not come back to haunt clients when the recovery begins.

These suggestions avoid the surface, across-the-board cuts that so many may leap to implement in the current economic environment. Instead, these are the cost cuts that will help your clients get through the rest of the recession and move into the recovery without struggles from shortages of experienced workers and managers, aggravated customers, and inefficient infrastructures that so often result from “easy” cuts. Rash cost cutting may continue to harm your clients long after the current recession is a distant memory.

The roundup of cost-cutting ideas shared below will be most valuable to the controllers and CFOs at your clients’ firms and can help them save big - perhaps so they can invest in other initiatives with your firm.

The suggestions are four cost-reduction approaches: quick hits, improved customer relationships, more disciplined capital expenditures, and spending reallocation. Most notable: These ideas do not begin with layoffs, which are not only unpleasant and damaging to morale, but often weaken a company’s competitive position.

Indeed, a rule of thumb among management consultants is that two-thirds of companies that use layoffs as a first line of defense in a downturn take five years to return to their levels of pre-layoff profitability. It is wise to consider not just severance costs but rehiring costs once the economy improves.

Take a quick-hit approach to cost savings.
From Meridian Consulting (www.meridianconsulting.com):

• A quick-hit program can have an immediate impact on spend rates, simply by identifying and eliminating the practices and procedures that waste money. Sometimes the cost-saving actions are obvious—eliminate the report that no one reads, get rid of checks and balances that add no assurance, and put a halt to momentum spending—i.e., outlays that continue long after their rationale has vanished. In fact, most quick-hit savings result from simply stopping activities that make no sense.
• How do you find quick-hit savings? Three proven approaches:
  • Bureaucracy busters: Hold bimonthly meetings of cross-functional managers that focus on finding unnecessary procedures, forms, and layers of oversight in all operating functions.
  • Work-out sessions: These are "facilitated" meetings that last several days and enable frontline personnel to 1) identify improvements in productivity, efficiency, and effectiveness; 2) develop action plans; and 3) gain senior-level commitment to improvement on the spot. For example: One manufacturer used work-out sessions to reduce the number of signatures needed for an authorization request from 12 to six, halving the time and cost of the authorization process. 
  • Delta taskforces: Senior managers typically initiate these projects, which use cross-functional teams to review and streamline procedures used to introduce new technology.  
    • Quick-hit programs give employees the opportunity to help cut costs, not heads. The resulting boost to morale makes quick hits a smart choice for the current economically-challenged environment

  Translate customer relationships into cost savings. 
  
  From Bain & Company (www.bain.com):

  • How do loyal relationships translate into cost savings? Consider the cost of serving a long-standing customer versus the cost of courting a new one. In financial services, for example, a 5 percent increase in customer retention produces more than a 25 percent increase in profit. Why? Return customers tend to buy more from a company over time. As they do, the cost to serve them declines. What’s more, customers often pay a premium to continue to do business with the client rather than switch to a competitor with whom they are neither familiar nor comfortable.
  • Cost-effectiveness dictates that companies segment clients to identify the subset that holds this repeat business potential, so they can target the investment in relationship building.
  • The companies that best understand cost savings through loyalty take very deliberate steps. These include: 
    • Modify customer-acquisition incentives: Reward sales teams and marketing channels for acquiring customers that stick. Consider commission or bonus reductions if customers defect before 18 months.
    • Reallocate marketing investments: Rank all customer acquisition campaigns on the basis of their yield of loyal customers. Shift resources toward programs that attract the richest mix of loyal customers.  

  No company is immune to the pressures of the market. But companies that focus on building loyal relationships that, by their nature, keep costs to a minimum, are better positioned to remain strong.

  Find cost savings in small-item capital budgets.
  From Monitor Group (www.monitor.com):

  • In looking for ways to cut costs, most managers reach for the headcount hatchet. But cutting costs doesn’t have to be such a bloody process. Indeed, a company can almost always create far more sustainable value by sensibly reducing capital expenditures. How? Not by postponing or eliminating big spending projects, which usually account for less than 20 percent of the budget anyway, but by applying a rigorous, disciplined evaluation process to the small-ticket items that usually get automatically rubber-stamped.
  • Small-ticket capital expenditures often prove to be gold-plated, unnecessary, or duplicates of other requests, but few managers have the time, energy, or inclination to investigate them.
  • A solid evaluation of small-ticket items involves a handful of questions:
    • Is this your investment to make? Sometimes, unit managers will request an investment that is the responsibility of someone else in the organization - or even some other organization altogether. Example: A request to help dealers upgrade their facilities.
    • Does it really have to be new? In many cases, the cost (including the cost of breakdowns) is 30 percent to 40 percent lower if a company continues servicing an existing machine for five more years, instead of buying a new one. Recommendation: Encourage managers to go beyond the analysis of different methods of acquiring a new machine.
    • How are competitors meeting compliance needs? Plan for compliance spending with the same rigor as for taxes. Observation: Managers who invest to comply with environmental, health, and safety regulations tend to be afraid they will be blamed for underspending if something goes wrong.
    • Does this duplicate existing capacity? Big, far-flung organizations with complicated operations tend to accumulate excess capacity. Recommendation: Make sure decisionmakers are communicating with each other as they pass a spending request down the line.
    • Are there signs of budget massage? This is common when management policing of capital expenditures is limited to seeing whether a unit’s spending matches its forecasts.

  By reducing capital spending for small-ticket items, a company gets to keep the heads—make that brains—that might have been fired. Paying more attention to small items in the capital budget creates that business rarity—a win-win situation.

  Reallocate spending while cutting costs.
  From Ernst & Young (www.ey.com):

  • The goal is not just to eliminate waste and inefficiency, but also to position the company for future growth. If managers focus narrowly on isolated cost-reduction efforts, such as reducing travel expenses, they may save money. But the savings will be trivial unless they are part of a larger strategy of change. Instead, managers need to think about such issues as:
    • Identifying the best opportunities. Companies should take a hard look at their assets, decide which are essential to the company’s growth, and sell those that are not, thus freeing up capital for reinvestment. Recommendation: Ask the question, "What businesses should the company be in right now?"
    • Addressing price cuts. Companies often cut costs and prices together. Price cuts might improve a company’s sales volume, at least for a time, but they can erode its brand, with the marketplace quickly accepting a company’s lower prices as the norm. Recommendation: Instead of lowering prices, be innovative in the design, manufacturing, and sale of products.
    • Targeting allocation of resources. Reducing costs is only part of the equation. A company must invest any savings optimally to achieve the full benefits of cost reductions. Illustration: Rather than cutting advertising across the board, a company might cut or eliminate spending on marginal products and invest the savings in promoting its strongest brands.

  From the June 2009 issue of Accounting Office Management & Administration Report.
  Copyright © 2009 IOMA, Inc. The Institute of Management and Administration.

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