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Strategic Cost Cutting: Meet Immediate Demands With A Forward-Thinking Approach - Forbes

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As organizations look toward 2024 strategic priorities, many leaders continue to grapple with economic uncertainty. This uncertainty is being driven by host of factors, such as, inflation, turbulent geopolitical dynamics, supply chain disruptions, high fuel costs, and more. This reality is creating a need for many businesses to take a hard look at cost management – and in many cases, an immediate need to cut costs.

In challenging financial times, it is easy to make short-sighted decisions to hit these immediate savings targets. However, it is imperative that business leaders approach cost management in a way that doesn’t just drive short-term results. Creating a strategy that also looks toward future growth and sustainable cost management is critical – otherwise, organizations are likely to find themselves in a similar predicament in the not-too-distant future. Doing so requires leaders to rethink typical approaches to cost cutting and cost management.

Acknowledge and Address Natural Fear and Anxiety

Fear and anxiety are inevitable with any cost cutting effort. In these situations, people’s natural Survive response is sure to be triggered. Efforts like centralization, automation, and headcount reduction all create a level of uncertainty for employees and generate a number of difficult questions (like, “Do I have a place in the future state?”). While many questions may not be answerable at the beginning of a new cost management effort, leaders can take steps to mitigate the extent of Survive that’s felt across the business.

First, leaders need to intentionally balance their approach to communication. Don’t shy away from the reality of the situation and what’s creating the need to find efficiencies, but also highlight what will be possible once the organization achieves a more stable cost structure. Shine a light on what will be possible for employees, customers, and the business. Second, be as transparent and communicative as possible throughout the process – acknowledge what is known and what isn’t, share any anticipated timelines, and provide points of contact so people can reach out with any lingering questions. And don’t just share the message once. Utilize a variety of forums and mechanisms for communication to increase the likelihood the message sticks. Lastly, be sure to celebrate small wins and progress along the way, directly linking these outcomes and milestones to new ways of working. This will help maintain momentum and will help skeptics see what’s possible.

Leverage Principles-Based Decision Making

Immediate Operations & Maintenance (O&M) cost savings can “easily” be generated through traditional approaches, such as headcount reduction, tightening the belt on travel, and renegotiating vendor contracts. However, these don’t set the organization up well to accelerate future growth following initial cost cutting efforts. Leaders can mitigate this risk by grounding cost management decisions in a set of core principles – balancing what’s needed today to fortify the business with what’s needed in the future to drive necessary growth. These core principles should be defined and shaped based on specific business needs and company values.

For example, organizations whose brands are known for new product development may establish a guiding principle that cost management efforts must be done in a way that doesn’t stifle innovation (e.g. don’t cut the entire R&D budget). Another guiding principle may be a commitment to embrace automation wherever possible, to allow employees to focus their efforts on the highest value, revenue generating activities.

Realistically, headcount reduction is likely an inevitable piece of the puzzle when facing economic headwinds. To minimize the short and long-term disruption created from layoffs and to ensure it doesn’t just create temporary savings, leaders need to assess talent needs based on what the organization is likely to require in the future versus what’s been needed in the past. Embracing the notion of principles-based decision making establishes principles for what will be needed to future proof your talent strategy and will guide any decisions around headcount reduction.

Future Proof Talent

Nearly every industry is facing some level of disruption – the emergence of Telehealth in healthcare, regulatory shifts and the push toward net-zero for utilities, new buying habits in retail – the list is endless. These disruptions are requiring new skills, talents, and ways of working. Leaders need to clearly define what skills are going to be most critical for their industry and their business to thrive in the future – including both technical or subject matter expertise, as well as broader skill sets.

In today’s fast-moving world, leaders are likely to get the highest ROI by investing in skills that are transferrable across roles and that will enable employees to quickly respond to unforeseen disruptions. Companies that invest in building agility, adaptability, and problem-solving skills are sure to see benefits now and down the line. These types of skills, necessary at all levels and across all functions, create a workforce that’s more adept at identifying market dynamics and proactively responding to emerging opportunities.

Actively Engage Employees in the Solution

Typically, cost cutting efforts are driven top-down. The CEO, CFO, or Business Unit leader will set a holistic target and dictate to their leaders and managers what slice of that target their team must hit. While it’s critical for senior leaders to provide clarity on the scope of cost cutting needed, it’s nearly impossible to hit savings goals in a sustainable way if it’s merely cascaded through the organization. Businesses need many people, across all areas and levels of the business, looking for and implementing creative solutions. To make this possible, leaders need to help employees understand what needs to be achieved, why now, and what these cost management efforts will enable. Then, let those closest to the work help solve the challenge.

For example, a large healthcare system needed to strip more than $500M from their operating budget to ensure they could maintain affordable prices for their patients. Senior leaders across each hospital provided specific targets to their teams, but also created space for employees across the facility to flag ideas for efficiency. During this time, one hospital had a fruit fly issue (common in summer months in any cafeteria setting). In the past, they had leveraged external vendors to address these types of problems. However, the facilities team asked if they could try solving the problem themselves, before engaging an expensive outside contractor. The team was able to resolve the issue quickly – and for less than one tenth of the cost. Now, imagine what’s possible if every employee across the system felt empowered to try something similar? These types of “small” efforts start to add up quickly if you can catalyze broad-based action.

It's no secret that organizations around the globe are facing very real economic challenges. Those that can approach cost management efforts in a way that addresses immediate needs while setting the business up for future growth – utilizing the strategies outlined here – are much more likely to find sustainable solutions that allow them to thrive well into the future.

Dr. Vanessa Akhtar is a Managing Director at Kotter, where she helps clients adapt and transform through a wide range of consulting and training services.

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