I was having a conversation with one of the CEOs I work with on the topic of cost cutting during an economic downturn. It seems that this is a topic that is on a lot of people's minds. When faced with declining leads, falling utilization and massive uncertainty, it is the only sensible way to proceed. Here's my take on how to proceed:
- Start with a strategy. Often, cost cutting is very emotionally charged. You are making decisions that affect people's lives. At very least they can impact morale. It helps to have an overall strategy so that each decision is in a context and has a purpose. One common strategy is to think about how you will “unfurl” your firm after the downturn has passed. If you were to restart your firm from one person (or your core group of owners) how would you build it? What would you add first, second, etc. to get to where you are today? Then make cuts in reverse order.
- Remove unnecessary overhead. When times are booming companies attract overhead and inefficiencies. Further, as markets evolve, costs often drop. Think telecommunications, insurance, coffee service and the like. Unless you have been watching these costs closely, there are probably savings to be had.
- Trim underperforming staff first. Don't make the mistake, which is so easy to do, of trimming people with less tenure or those at a more junior level first. I've made this mistake myself and have regretted it. If you had to do it all over, knowing what you know now, who would you not hire?
- Cut unproven marketing. It may seem odd that a marketing firm would suggest cutting marketing costs. Here's why. It's true that economic woes in your target market caused this problem. It is also true that marketing and sales will lead the way out of it. However, some marketing spending is unproven or less efficient and is therefore a good candidate to cut. If you have been tracking results of your efforts you will know what to cut and what to invest in. If you haven't been tracking, get some help in figuring out where to spend. Only a fool would cut spending on something that is proven to help bring in new business when the problem is not enough revenue.
- Consider outsourcing. Some functions that you have staffed internally may be done at less cost externally. Think about it as contracting to deliver a specific outcome when you need it. In essence you are turning a fixed cost into a variable one. If the work is there to justify the cost, spend the money. If not, save the money by not carrying an unneeded salary.
It's no fun for most entrepreneurial CEOs to have to deal with this issue. If there is an upside, it is that tough economic times can force you to reinvent your firm in a way that makes it stronger and more competitive.