From the Editor: Did You Cut Costs in the Wrong Places?
"We have found that most companies, when confronting cost reduction, tend to make cuts across the board. I believe most executives know that that's not quite right, but they resort to that." So said Cesare Mainardi—managing director of Booz & Co.'s North American business, and co-author of "Cut Costs, Grow Stronger: A Strategic Approach to What to Cut and What to Keep"—in a Harvard Business Publishing video interview exploring how to cut costs—strategically.
There are effective and ineffective ways to reduce organizational costs, and, as Mainardi suggests, the difference can mean the success or failure of your business.
"… The activity of expense reduction is really a strategic choice," he said. "And, in fact, there is no time like that to make some very sharp decisions about what's important, what is strategic, and to make decisions around cost in that context."
Mainardi suggests that if companies focus their expense on their "capabilities"—the activities that, he says, "make a real difference in terms of winning in the market—then great things happen. Not only are they able to cut costs where things matter less, but they're able to invest in the areas of the business that will cause them to thrive and to grow, even as an economy returns, for instance."
He defines "capabilities" as "a combination of know-how, people, expertise, processes, all that happens in the business that allows that business to out-execute competition." To evaluate cost-cutting strategies, a company (or department) should consider, "What is it that they do that is not essential to [those capabilities]?" he said. "The key is to figure out what is essential to the success, and then what is just required to keep the lights on …, [and then] triage the two and invest in the activities that cause success, relative to competition, and then to be as lean as possible in everything else."