Procurement 101Cost Control vs. Cost Reduction: What’s the Difference?
Maintaining financial security for business operations of any size boils down to two essential tasks: Getting the most out of every dollar invested and finding ways to trim the fat in terms of spend allocation. Cost control is critical to enabling this, as is cost reduction. These are two different terms for a reason; they represent processes that, despite sharing some similarities, are wholly unique in terms of execution, features, and purpose.
In fact, when it comes to the difference between cost control and cost reduction, there are several important ones to remember. While cost control is more of a proactive approach, outright reduction pertains to addressing existing spend problems. Of course, there are many perks associated with both processes as well, which we’ll also get into.
Let’s revisit the fundamentals of cost control and cost reduction to help differentiate between the two.
What is Cost Reduction Really About?
The process of cost reduction is more action-driven, focusing on delivering tangible results. It involves making long-term, usually permanent cuts to specific expenses. This can include everything from ordering quantities to departmental recruitment budgets – there’s really no limit to what you can minimize spend on if you dig deep enough. Primary features of cost reduction include implementing what was finalized during the initial analysis and planning phase (the preceding cost control stage, which we’ll get into later). The fact that this is where companies can actually see changes taking effect is why making cuts is a popular trend in most business applications, particularly when the hard times hit.
That doesn’t mean this is the first thing you should be doing!
Don’t Skip Straight to the Process of Cost Reduction
Despite the immediate effects, there’s obviously an inherent danger with knee-jerk decisions and behaving more reactively. Making informed, proactive, and smarter cost reductions via a streamlined workflow solution is much more conducive to maintaining operational standards. Without applying sufficient logic and reasoning to these actions beforehand, you’re essentially gambling or flying blind, so what is cost reduction going to represent for your stability, quality assurance, or other critical elements? For example, if you cut the number of planned hires in R&D, will it affect a planned product launch too negatively and incur delays? Or, what if there are compliance issues that need to be addressed, but the department responsible doesn’t have the sufficient capacity needed to address them?
The typical process of cost reduction must be preceded by implementing an effective cost control strategy; only afterward is it really “safe” to make cuts to specific units. The reductions may be gradual over a prolonged period or more substantial in less time, but note that opting for the latter is more invasive and could disrupt the operational flow, and you don’t want a domino effect of internal problems to form. Regardless, it’s best to minimize the number and intensity of any reductions, achieved by performing only the most critical ones in a more informed manner.
This is why having sufficient and accurate data to back your decisions is important – reductions are designed to be corrective with an immediate, larger scope, but there is also a risk element to consider and often no walking these decisions back. While changing suppliers, cutting production costs and other methods can help you optimize your day-to-day spend, thinking ahead about how it affects tomorrow is even more important. Some aspects of your specific operations may prove more useful by being left alone or invested in more, but you won’t know without sufficient data analysis.
Exploring the Real Purpose of Cost Control
Now that we’re aware of the risks of utilizing the features of cost reduction straight away, let’s take a closer look at the elephant in the room. Cost control is essentially a means of using data analytics and critical insights to create more effective financial roadmaps, employing proactive planning to better prevent so-called “money pits” – bad investments or inefficient spend allocation, if you will – from forming. The scope is naturally more limited in this sense as there are typically fewer or no tangible issues present during the initial cost control process. This is because, in most use cases, the process is implemented to establish financial planning and operating standards to reduce the need for the cost reduction process down the line, which is ironic but sensible. While no company will ever not have to employ the latter process, better-maintaining and mapping out costs from the outset can minimize a number of risk variables, which could otherwise require future reductions.
Proper Cost Control and Cost Reduction Implementation
In that sense, the importance of cost control is clear; without the right strategy in place, you’re only able to kick at the surface in order to stay afloat. Relying primarily or solely on cost reductions is akin to building a business on sand; the more you pile the cuts on, the deeper your operations could sink due to toxic after-effects. So, don’t overlook the purpose of cost control: To help a business maximize the efficiency of their financial planning so they don’t need to lean on reductions as often. Excessive cuts can hurt everything from departmental performance efficiency to employee morale, customer satisfaction, and even quality control – these are the toxic after-effects that you want to avoid during the process of cost reduction. By refining operations with a data-driven, more accurate roadmap, your team can more easily keep costs at established or projected values. As cliché as it sounds, knowledge really is power here.
In closing, try to remember this rule: Step one is gathering all the critical facts; step two is making sensible, more informed alterations. The main difference between cost control and cost reduction is that while the former process can be performed and still provide benefits, the latter could potentially hurt a business’s performance if not implemented correctly. Jumping right into making cuts without gathering and consulting all the facts skips the control aspect entirely, and with that could come a bevy of issues you’ll then need to address – which could drive expenses back up again anyway.
Want Better Cost Control and Cost Reduction Results? Schedule a Tradogram Demo!
Regardless of your expertise in corporate financial planning and management, we at Tradogram can help you get more out of your operations while developing smart, proactive strategies. Our state-of-the-art platform empowers businesses with more data, greater end-to-end clarity, and more accurate forecasting via optimized workflows. Contact our team today to learn more about our solutions.
Subscribe to have new content delivered directly to your inbox.