Cost Containment: The Best Ways for Businesses to Cut Costs
The recession and economical downturn in America has created a need for all organizations to contain costs. Since there is a need to continue to contain costs in the future, determining how to cut costs without damaging the company’s ability to collect revenue and survive over the long-term more and more challenging over time. How do most businesses contain costs? Which cost containing strategy is best for you business? The answers to these questions vary but this article will help you explore the most popular cost containment initiatives and the benefits and drawbacks to each.
All organizations may face a common need- the need for containing costs—but this is where the similarities end. Each company or business is unique. What is valued and vital to one business may not be in the next. One organization’s strength is another organization’s weakness. Determining which cost containment initiatives are best requires a thoughtful analysis and consideration of the organization’s current structure, mission, personnel, clients, and function.
Step 1: Analyze Your Company
Review how your company is currently functioning and determine where there is waste. The first place businesses look to cut are areas that are no longer necessary for the company to survive or areas in which the business is not using funds as efficiently as it could. When waste is found, cost containment becomes easier. A business can find better prices for supplies, cut down on the supplies used, decide a position is no longer needed, re-evaluate current organizational structure or analyze in general if any current costs were necessary in the past but no longer beneficial. The best cut would be in an area that is actually making the company inefficient in some ways. Many organizations not only cut costs but optimized profits and production by eliminating unnecessary positions or procedures.
When an organization cannot identify these changes that do not affect the organization’s revenue, productivity and overall stability, cost containment decisions become more complicated. Decision makers need to determine which cost containment strategies would yield the most savings while maintaining the company’s ability to survive long-term.
The list below includes the most common ways business cut costs.
When considering these cost containment strategies ask yourself the following questions:
- How much money will we save?
- Why was the cost implemented to begin with and what does the company risk losing by eliminating it?
- Will we risk losing clients/revenue?
- Will we risk losing employees?
- Do the risks outweigh the savings based on our current situation and our need to save in order to stay afloat?
Cutting Costs by Reducing Travel Expenses
This was the number one cost containment strategy used by businesses according to most surveys.
Travel expenses include business trips, conventions, seminars, meetings, gas reimbursement, meal expenses while traveling, travel between clients, etc. Any business attempting to reduce costs should evaluate this area first. Areas that do not directly support client or employees should be cut first. Most businesses noted cutting client-related travel last since making cuts associated with supporting clients has potential long-term damage to the company’s performance.
If considering cutting travel expenses, consider how important travel and travel-related reimbursement is to the company. Some companies may find re-evaluating who is traveling to where may prove to be cost-effective. Having employees travel to the closest destinations, clients or meetings may cut costs without cutting any tasks at all. Traveling between the furthest locations will always cost a company more than traveling between the closest locations. Someone traveling from client to client may just need to change their schedule to reduce travel time and costs between clients.
Cutting Costs with a Hiring Freeze or Hiring Reductions
Most businesses can temporarily achieve production/performance goals without filling open positions right away. There are significant costs associated with hiring and training a new employee whose overall job performance may not begin to benefit the company in any way for 6 months to a year.
When deciding to pare down the workforce in this manner, it is important to also consider the job responsibilities of current employees and each task a position performs. Certain tasks are essential to operations while others are not. The company still needs to accomplish its mission so ensuring an adequate workforce is essential.
Cutting Costs with Layoffs
This is the first type of cost containment strategy that comes to mind to most yet it can be the most harmful. Cutting back on the number of employees dedicated to company’s mission may leave most companies with significant losses to productivity and profit long-term. Laying off “extra” or nonessential workers is a reasonable way to cut costs without harming the company long-term whereas laying off employees in vital positions creates more long-term problems for the company than the short-term savings of layoffs are worth.
Some companies decide to use temporary layoffs. This is a difficult strategy to execute effectively. More often then not, temporary layoffs become permanent layoffs because employees find employment elsewhere and/or the company has difficulty filling the position with another qualified worker. The company needs to weigh the current hiring environment for these positions and the company’s ability to draw in the same or similar workers once these positions need to be filled again.
Cutting Costs with Holiday Party Cancellations
Depending upon how much a company invests in employee or client parties, this strategy may not save the company much money. These parties often keep clients and employees happy. The cost versus benefits of this type of strategy need to be weighed. Since party cancellations have less of negative effect on actual company performance, this tends to be a very popular option for businesses attempting to shave off some unnecessary expenses.
Cutting Costs with Reducing or Eliminating “Perks”
Perks my definition are the benefits of working for or with a company that are no required but have an overall added benefit to the client or employee. It is important to analyze the possible consequences to reducing or eliminating perks. A company may not be harmed by the loss of some clients and employees. Yet, a company may suffer significant loses if certain clients or certain key employees leave. Consideration to what the company could potentially lose and how much could be gained in saving should be weighed before utilizing this cost containment strategy.
Cutting perks employees do not appear to value should be considered first. Perks include anything such as catered meetings, tuition reimbursement, employee matched contributions to 401K, access to company cars, etc.
Cutting Costs with a Salary Freeze or Salary Reductions
This strategy is currently favored over layoffs which is a change to typical business operations over the last couple of decades. If all or most positions and tasks performed by each employee are essential for the company’s productivity and profits, then reducing the payroll costs by decreasing each employee’s salary as opposed to laying off employees or reducing their hours is preferred. This allows the company to continue with the same workforce. The disadvantages of this option include running the risk of having disgruntled employees, high employee turnover, and a decrease in overall production.
It is essential for any company considering this option to deliver the message to employees in a careful and sensitive way as well as find low or no cost ways to support employees after the cuts.
Cutting Costs with Reducing or Eliminating Year-End Bonuses
This strategy tends to be one of the first strategies used in some industries because bonuses just by definition are extra. What a company needs to consider is who important year-end bonuses are to key employees and what specifically a bonus system is encouraging within the company.
In certain industries, bonuses are regarded as part of an employee’s salary. A cut to these bonuses may cut the employee’s overall salary significantly. The company risks losing employees to the competition. If bonuses allow the company to reward the highest producing employees and encourage higher production rates, the company may suffer significant consequences to production and profit after utilizing this strategy.
Cutting Costs with Cuts to Workers’ Hours
If this strategy is used, workers will either need to use their time more effectively or will need to eliminate nonessential work tasks. Since a reduction in hours reduces an employee’s pay, the company faces the risk of lower morale. You will need to weigh the costs and benefits to this decision. In some cases, reducing hours and allowing ineffective or unmotivated employees to leave and replace them with new employees who can be shaped to accept the new expectations may be most beneficial for the company. If workers do not have time to complete all essential tasks, the company’s ability to survive over time diminishes.
Cutting Costs through Forced Unpaid Vacations or Instituting a Furlough Program
Bigger companies tend to utilize these methods to cut costs. These changes get mixed reviews from employees. Decision makers should analyze their work force. Those who can afford unpaid time off may see this as positive whereas those who need to continue to work in order to pay the bills will be searching for a new job during their unpaid time away from the office. This may be a good way to cut costs right away and if you have determined that it would also be beneficial to trim the workforce but do not want to do so negatively through layoffs and other means, this cost containment strategy may achieve this without lowering morale for the employees who stay.
Cutting Costs through Telecommuting
Most businesses these days could be run with little to no employees working physically in the office. It is important to analyze where each type of work is most efficiently completed. Some tasks may require face to face contact, meetings, client appointments, etc. while other tasks may best be completed in an employee’s home office without the distractions of a typical office setting. Most companies will find allowing employees to telecommute at least part of the time has cost saving benefits. Employees can stagger their schedules and share office space for when they do work in the office allowing the company to achieve the same amount of productivity using less office space. Reducing this fixed overhead cost is huge for most businesses who would otherwise not even consider finding a way to reduce these types of fixed costs that are often seen as necessary for the business to continue to grow and thrive.
Cutting Costs through Four-Day Work Weeks
This cost containment strategy is often met with skepticism. It has proven beneficial to many businesses but each company is different and the decision makers attempting to cut costs need to review their current activities, employees, and structures to determine if this would be beneficial or not. Businesses that have cut down to a four-day work week have found that it has raised morale, increased productivity, decreased absenteeism, decreased fuel costs, and reduced energy costs (when office is closed an extra day per week). A four-day work week may not work for all businesses especially for businesses attempting to remain available for clients throughout the week or for those who will see a decrease in productivity if the work tasks are completed over a longer day such as work more physical stamina or a great deal of mental focus and concentration.
Choosing Which Ways to Cut Costs
It should be noted that one study found that companies utilized approximately 5.3 different cost containment strategies to meet their goal on average. Successful businesses that weather the storm and flourish in the future see their cost-containment efforts as not just a short-term way to improve cash flow but to protect and even improve their company for the future.
Communicating Cuts to Employees
- Give appropriate notice to employees. Not only will employees accept the news if they learn the change will take effect in 1-2 months, some states have notification requirements for employers. Time allows employees to make necessary adjustments to the changes you are implementing.
- Be open with your employees. Tell employees why changes must be made and let them know how long to expect these changes to last. At a time when employee benefits and perks are diminishing, retaining their trust, understanding and confidence.
- Emphasize how the changes are fair and for the long-term good of the company. Ensure the changes you are making are actually fair to the individuals you employ. Finding out that top executives continued to enjoy a lavish company retreat or did not suffer a cut in salary like other employees not only lowers morale but could result in potential lawsuits.
- Present the news in the most positive way possible. This last suggestion seems the most trivial yet is the most important. If employees know that they experienced a salary reduction instead of experiencing layoffs, they may feel grateful. When your company shows compassion and the ability to weather or storm responsibly, the company’s image to clients and potential new hires is more likely to remain intact.
Challenger, Gray & Christmas, Inc.- Challenger Cost-Cutting Survey
Need to Cut Labor Costs but Avoid Layoffs? A Checklist of Cost-cutting Options (Part 1 of 2) by Dr. John Sullivan
Fisher & Phillips LLP; http://www.laborlawyers.com.
Most beneficial cost containment strategies for both business owners and employees
Sue B. (author) on March 17, 2011:
Thanks for commenting, fay! I'm hoping to get more people to vote in the poll. I am curious to know what the opinion of others is going to be. What I find most interesting is what sounds best or what we believe will be best is not actually always the best option since it can have unintended consequences.
Fay Paxton on March 09, 2011:
Excellent hub for employers looking to trim the fat. Unfortunately, far too many companies chose layoffs and salary freezes.:)