More for less: Steps to strategic cost reduction
Salaries and wages are one of the largest costs of every company, and are often the most difficult to control. But changing compensation is touchy for those who are affected, so it is important to handle the changes with compassion, truth, and firmness.
One way to do this is to identify your key employees and get their commitment to your plans before you implement them. Companies that reduce compensation or fire employees without considering other methods to increase productivity or reduce costs invariably suffer from poor morale, indifferent customer relations, and further declines in sales, potentially falling into a downward spiral from which there is no recovery.
Tips to Lower Direct Labor Costs
The following tips will lead you through a difficult, though necessary process to ensure your company is positioned to survive and thrive in any economic environment.
- Review Levels of Compensation
Salaries and wages tend to move one way: upwardly, even though markets and financial conditions change. Review your pay schedules to be sure they are in line with current trends, not the result of history. If current employees are earning more than what would be paid for their jobs today, delay or make only token raises until such time that your payroll comes in line with current trends.Have a frank talk with the employees affected so that they know what to expect and why their expected raises will not happen as in the past. You might also suggest ways they can become more valuable to the company by adding skills to earn future raises.
- Reduce Employee Turnover
If you have significant turnover, you have excess costs in your operation due to the fees and salaries of those people engaged in the recruitment, selection, employment, and training of new employees. The indirect and invisible costs are poor quality, longer production times, greater waste, greater oversight, and even fraud, since your employees view their time with you as temporary. Maintaining a stable employee core is the key to effective cost-cutting.
Look across the whole organisation and differentiate the strategically-critical ‘good costs’ from the non-essential ‘bad costs’.
- Cross-Train Employees Specialists – workers with a unique skill or certification/degree – generally command premium pay in the marketplace. But they also inhibit your ability to make changes in your operation if you are dependent upon their skills. A workforce trained to perform a variety of operations will enable you to make changes, including layoffs, without affecting your ability to deliver products or services to your customers.
- Trade Time Off for Payroll Expense
Some companies have cut costs by changing their hours of operations. For example, going to a four-day, 10-hour per day work week from a standard five-day, eight-hour workday in return for a lower salary or wage may be welcomed by employees who seek more time with families or on personal projects.
- Share Jobs Between Employees
Office jobs are especially suited for sharing duties. Replacing full-time employees with part-time workers can reduce your administrative costs without necessarily reducing the hours for which the full-time employee was available. In most communities, there are a number of skilled people limited to working part-time. Utilize this resource when your need is less than a full work week or share a full-time job between two part-time employees.
- Convert Fixed Salaries and Wages In to Commissions or Incentive
Rather than terminating employees, try converting their costs into an expense that is only paid when there is accompanying revenue. For example, a salaried salesman may be willing to accept a higher commission rate and less guarantee, or an installer might accept work as a contract laborer when work is available.
- Reduce Perquisites (“Perqs”)
Eliminate the perqs that began and grew during better times, including those you take as an owner. Eliminating visible perqs signals to employees that you are serious about cutting business costs.
Is it more important for a company to lower costs or increase revenue?
- Eliminate Redundancy Between Departments
As companies grow, they often evolve into a group of independent departments, effectively eliminating inter-departmental communications and flow. In many cases, the same task is repeated in several departments. Periodically review your processes – handling orders, collecting funds, directing installations – to ensure minimal redundancy between separate functions.
- Automate and Outsource Non-Critical Tasks
Technology, specifically computer software, has improved enormously in recent years; it can handle more duties, it’s user-friendly, and it’s inexpensive.
Leverage your existing employees by using the most up-to-date tools to simplify and speed up their work. Consider outsourcing your accounting and bookkeeping needs to third parties, like MARKEF ACCOUNTING. Rather than maintain a certified public accountant, for example, you may be able to utilize a less expensive clerk and outsource oversight to an independent accounting firm for less cost than the full salaries of the specialists.
Before taking such action, however, be sure that the task performed will not affect the quality of your services/products, the ability to deliver services/products, or your ability to oversee the complete operation.
Cutting significant costs in a company is similar to squeezing a balloon: As you pressure one area, another gets stretched. As a consequence, you must be attentive to unexpected consequences and be diligent in your implementation.
Communications with employees prior to beginning a cost reduction campaign, with frequent updates, is critical to avoid wild speculations and destructive rumors among the staff. Tell them why the change in policies affecting costs is necessary and what you hope to achieve as a result of the change, and encourage their participation and ideas in the exercise. Being involved, rather than being a victim, will maintain their commitment to the company and solidify your role as a leader, not a bean counter.