Moneymanagement’s Weblog

Is cost cutting the need of the hour?

Posted in management by moneymanagement on October 8, 2008

In far too many cases, “cost cutting” is a panic knee-jerk reaction to a situation that only arose because of an abject failure to plan ahead. 

This economic slowdown — or any slowdown that might occur in a business sector or individual company even in more-stable economic times — is a purely cyclical event, albeit exacerbated by the derivative crisis. As such, it should have been on the radar of any alert company, which should have prepared itself in more prudent fashion. Even a derivative meltdown was “always in the cards” and would inevitably happen, simply because it is a lunatic ponzi scheme that was bound to implode. Cost cutting is very common word in the current market scenario. Why does every one look at Cost cutting?When an organization is spending some amount initially thinking that it would benefit. But why the organization is thinking that the same cost is going waste now?

According to me, cost cutting can be done (broadly) in 2 ways. 
1) Cost cutting to reduce additional investments 
2) Cost cutting to optimize the current mode of business. 

I would choose the second one. May be the investment that you are making now may not yield immediate results and the payback period may be slightly longer than usual. Nevertheless, they will be fruitful. 

This economic turmoil can be viewed positively as an opportunity to streamline legacy, redundant operations an organization has. Technology can be used more to automate manual operations thereby reducing longtime costs. If technology is already there, disparate systems can be combined to form reusable capabilities (SOA) to reduce maintenance costs. I guess many organizations have already started doing that. Also, its time for organizations to come out of their cuticles and start looking for cost-effective vendors. So there might be an increase in outsourcing on one side when companies keep scrapping projects on the other side. 

So, advantages are obviously there. It depends on which type of cost-cutting you are making.

So it all comes back to refocusing on the next 5 years of the company’s cash needs, and that might be satisfactorily accomplished, and quickly, without any drastic cost cutting at all. For sure, there will be plenty of “fat” to be found in any company (I could find 10%-20% fat in any business, no matter how lean it thinks it is). But if you cut the wrong “fat”, or remove too much, you run a sever risk of cutting into the “muscle” of the organization, thus weakening it to a far greater degree than a small amount of waste.

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