We are fortunate to be experiencing the second longest economic expansions in history. The well-regarded Shiller price-to-earnings ratio has only been higher once in history before the dot-com bubble burst of 2000 and just surpassed the October 1929 level which was followed by the 12-year Great Depression. If you believe this run will continue indefinitely, then you need to read no further and best of luck.
Today’s economic optimism and stock market exuberance, especially in the United States, seduces corporate leadership into believing in a “sprinter mentality” which prophesizes that if they simply grow revenue fast enough, they’ll never have to worry about costs. However, creating a great company that will stand the test of time is a marathon, not a sprint. Only those companies that are creating effective and efficient operations now will continue to be successful through the next eventual economic downturn.
Before going further, a myth needs to be dispelled which incorrectly concludes that “controlling costs slows growth.” That is only true for the most ominous of circumstances such as when a company is facing bankruptcy and must make expense reductions that may hamper its fundamental operations.
Beyond that exception, most companies can actually experience accelerated growth if cost management is performed correctly. Like high-performing athletes, companies function better and produce superior results when they are lean, toned, and focused.
Here are some of the most common challenges making companies bloated or inefficient.
Technology gone wild
No one can deny that in the past few decades the technology explosion has been transformational. However, there now seems to be an endless number of technologies all claiming to be the “solution” a company just can’t do without.
Company technology departments, who find new and exciting technologies almost irresistible, tend to overeat from the technology smorgasbord and suffer “tech bloating.” The result is that companies find themselves burdened with too many technologies doing too many similar things. While the underlying technologies certainly cost big money, the secondary support can accumulate to be larger than the original purchase price.
The higher the quantity of technologies, the more staff and consultants are needed with specialized knowledge to effectively manage and integrate them. Furthermore, often companies can’t effectively be experts in all the technologies they own and start to experience costs related to failures and outages of the very technologies that promised to make the company operate better.
Were we supposed to manage the vendors?
Despite what they tell you, the first priority of vendors is to make the most money possible from their customers. That’s not to say vendors don’t also want to provide a high-quality product or service, but their goal is to be paid as much as possible for it and to expand their presence whenever possible.
Vendors that are not properly managed are best positioned to accomplish this goal. In fact, vendor management often fails before the contract is even signed. That’s because companies don’t clearly understand and document their own requirements for purchased goods and services. That leads to vendor supported initiatives that experience multiple change orders, delays, and, of course, cost overruns.
The hatchet approach
The most common side effect of not continually managing costs is the eventual requirement for a company to reduce costs abruptly. This often takes the form of large-scale headcount reductions. However, mass layoffs are often the wrong long-term solution. Companies turn to them because they produce the fastest result at a time when companies are desperate. Employees can be terminated and their costs are off the books in just weeks. However, cost reductions carried out in this manner can cripple an organization. Instead of solving the problem, this approach can start a death spiral of weaker operating capability, lowered product/service quality and eventual need for further cost reductions. Along this path companies steadily decline, employees suffer, and shareholder value crumbles.
The final point
Whether your company faces all of these common challenges or none at all is really not the point. There are two primary takeaways. First, improving a company’s cost management not only increases profitability but actually stimulates growth by creating more organizational efficiency and effectiveness. Second, cost management efforts take time to implement properly.
Companies forced to react quickly when economic conditions suddenly worsen will not fare well against competitors that have prepared for this circumstance.
Author: Duane R. Deason, President, The Efficacy Group
