Procurement 101How to Use Cost Controls to Create a Recession Proof Business
Responding to a recession is never easy. Some companies don’t survive a long-term recession. Others survive, but don’t flourish after the recession is over. Cost control strategies are a part of every company’s plan to create a recession-proof business. However, research shows that the type of cost control strategies a company uses will have a big impact on how well they endure and recover from a recession.
What is the Importance of Cost Control?
The West Monroe Partners consulting firm conducted a survey of business leaders in the U.S. to find out what they would focus on to recession-proof their companies. Here’s how those leaders ranked the things that would help them through a recession.
- 72% cutting operating costs
- 70% increasing operational efficiency
- 60% capital cost reduction
- 50% capturing market share and/or acquisition
- 48% technology cost reduction
You’ll notice that three of the top five strategies relate directly to cost control and cost reduction. In addition, increasing operational efficiency typically results in cost reduction. The idea of capturing market share has proven to be a game-changer when it comes to surviving a recession.
Shortly after the 2007 recession, researchers at Harvard conducted an extensive study on strategies that can recession-proof businesses. They studied companies that went through three recessions to identify the strategies that worked and those that didn’t. They found that the traditional approach of reducing headcount to cut costs didn’t work well.
(We’ve warned about dangers posed by cutting staff in another post about business cost control – the research doesn’t lie!)
The research indicated that companies using workforce reduction as their primary cost control strategy had only an 11% chance of coming out of a recession with breakaway results. The companies that were strong during and coming out of recessions were the ones that reassessed their business models overall to achieve permanent cost reductions. Then, when business picked up again, those companies could grow their profits faster than their competitors could.
In addition, successful businesses put more money into capturing additional market share. For example, during the most recent recession, Target realized that consumers focused more on needs rather than wants. They invested in stores with expanded floor space to focus on food. By 2018, food and beverage represented over $14 billion in sales for the company.
The conclusion is that recession-proof businesses in 2020 would do well to take a company-wide approach to find cost control strategies and to put some of that savings into capturing additional market share. The question is, “Where should you look for places to control and reduce costs?”
Developing Effective Cost Control Strategies
Start by reviewing your operations and resources. These steps will help you narrow down your search.
- Identify your costs: Look for places where the costs don’t align with your strategy. Collect cost data, and then analyze the costs for the most important operations in your business to the least important. This exercise will let you see where there may be hidden costs or costs that don’t add value to your operation.
- Complete short, medium, and long-term analyses: Don’t fall into the trap of identifying outstanding short-term cost reduction opportunities only to find that the benefits don’t last over the long-term. If you find opportunities that will reduce costs over the long-term, those will undoubtedly be more beneficial.
- Improve your business processes: Take a business-wide perspective to understand how your business processes operate. Break down barriers between departments to understand where opportunities for improvement exist. Optimizing a process in one department that will complicate the process as it flows through the rest of the organization is never a good idea.
- Review existing contracts: It’s not difficult to stay with a vendor over the long-term and there are advantages to doing that. However, be sure to take time during this process to review contracts to determine if you can negotiate more favorable terms. You may also discover that the time is right to change vendors.
- Consider automating cost management: Look for automated tools that will let you manage budgets and review spending habits. This will help you make sure that your departments are sticking to their budgets. You’ll also have the opportunity to identify areas where cost reductions are justified.
- Outsource services: Once you’ve identified areas that don’t directly add value, you may find opportunities to contain costs by outsourcing. For example, unless you are a technology company, running a big IT operation may not be your best approach. With the proliferation of cloud applications and managed service firms, you may get more value from your IT staff when they aren’t involved in daily maintenance tasks.
Technology Can Support Your Cost Control Strategies
Improving business processes can uncover a wide range of opportunities for automation that can recession-proof your business. For example, the procurement process is one that spans your entire organization. You may be able to use new technology to minimize labor costs and/or reduce the cost of technology.
(Never audited your purchasing policies and procedures before? This audio interview can help to get you started.)
For many businesses, the entire procurement process costs more than it should. Procurement processes are full of time-consuming manual tasks. These tasks prevent employees from spending time on higher-value tasks or on tracking and analyzing spending to find ways to support the business more effectively.
In addition, automated systems that run in the cloud can help you reduce or control the costs of capital expenditures on hardware. For example, you can try Tradogram with a free account to see how a powerful but affordable cloud-based procurement system can work for your business.
Whether you’re looking at procurement or any other business process, you need to look for automation that will be simple and quick to implement. It doesn’t matter how many features an automated system provides, if it doesn’t get used to its full potential, you’re just pouring money down the drain. You should also do a detailed cost/benefit analysis. Try to find automated tools that give you the best return at the lowest price.
Carefully planned cost control strategies are critical for businesses to make it through a recession successfully and to emerge perhaps even stronger than before. Assessing your business operations across the organization to identify cost control strategies will pay benefits whether the economy is in a recession or not.
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