You can’t shrink a business to greatness!
“You can’t shrink a business to greatness!” These words were uttered some years ago, by a non-finance leader, who was just beginning to understand finance in his role as CEO. Having been brought up under the conventional thinking of cost-cutting, in my professional career as a finance person, this got me thinking. Shortly afterward, what followed in terms of experience led me to believe that there was a lot of truth to these words.
It seems natural for a company to spend more freely when the going is good. However, when things get challenging, the first thing leaders typically do is to cut costs. Nothing wrong with that, but the way it is done can be problematic. From bullet train exercises that span a month to addressing low hanging fruit, companies adopt various methods to identify areas for cost reduction.
The question is: Are these cost reduction steps sustainable in the long run?
This is where many organizations falter. Companies often choose “short term gains” and hope that the current challenges will tide them over. However, the adage that they must follow is “short term pain will always certainly bring long term gains”.
A common cost reduction method is headcount reduction or freezing headcount. Irrespective of the extent of headcount reduction, the workload remains the same which can cause the organization to walk with leaded shoes. This is where Finance can add value to the business.
Pragmatism requires companies to think long-term. Continuing with the example of headcount reduction, companies need to identify areas where headcount reduction can be permanent. Automation, implementation of Artificial Intelligence (AI) and Robotics are some of the methods through which it could achieve permanency and yield productivity that is sustainable in the long-term. Cost-benefit analysis has shown significant positive NPV and paybacks on such investments. In a business model based on FTEs (Full Time Equivalents), companies could leverage automation, AI or Robotics to upskill their existing resources to perform higher skilled tasks and not hire additional work-force every time there is a requirement. Similarly, companies must also critically look at the various roles within its businesses and decide whether these positions are essential to its overall success. If the answer is no, then those roles should be eliminated.
The other area that companies need to look at is the yearly growth rate of compensation. In most enabling functions, compensation is the primary driver of cost. Having key job definitions and bench-marking roles with minimum and maximum salary ranges can help to effectively control the growth of this cost. For those employees who have reached the salary cap in their roles, companies can consider using a “lump-sum” model. This means that employees would get their merit increases in lump-sum form, rather than as an increase to their base salary. Many organizations that have adopted the “lump-sum” model have seen a significant reduction in the growth of compensation cost to the extent of around 3-4%.
Seat utilization is a key metric that is most commonly used by enabling functions, where multiple processes work over different shift timings in a day. It is the ratio of headcount to the number of seats available. This helps to spread the fixed cost per seat over these multiple processes and helps functions drive economies of scale.
Span of control can also drive sustainable productivity. However, care must be taken to ensure it is not at the cost of output quality.
Another area that companies, especially financial services organizations, should look at is how they manage their vendor payments because supplier discounts can drive lower costs. It’s often thought that longer payment terms from suppliers will help companies to match their average receivable days and therefore manage their cash flows better. Recent practices show that financial services companies are now beginning to realize the value of bringing a significant portion of their supplier base under a discount program where suppliers provide them with a discount for an early settlement of bills. The impact to the cost base and net income is direct.
To recap, companies should continuously identify areas to drive long-term productivity. For example, where AI or Robotics need to be implemented, they should go ahead and make the investments while they are not yet in a challenging financial period. Companies should avoid falling into the trap of looking for short-term gains by making decisions that directly impact employee engagement or by pruning down advertising or marketing expenses that are more than likely to drive higher revenues in the long term.
Surely, you can’t shrink a business to greatness!
