Or, don’t just lunge at cost cutting- adopt approach that helps to focus on value creation and cost alignment

In the current business climate, the challenges are twofold: sustaining profitability and maintain the capacity for value creation. There’s a heightened focus on cost-cutting as the immediate remedy for financial ailments. However, knee-jerk reactions can be detrimental in the long term. This post aims to shed light on the equilibrium between cost management and value creation that C-suite executives must strive for, especially in middle-market companies with revenues between $50 million and $5 billion.

The Temptation to Just Cut Costs

We are in a phase of the business cycle where cost-cutting seems to be the elixir to all problems. The media spotlight on downsizing and operational cutbacks can tempt leaders to make hurried decisions, focusing merely on reducing expenses. This approach may show quick wins, but the medium and long-term implications often offset these immediate benefits.

Lessons from the Past

The history of Leveraged Buy-Outs (LBOs) in the mid-1980s offers valuable insights. The dominating narrative was to “cut costs,” and it seemed like the logical step to generate sufficient cash flow to service debt. However, many businesses realized that this approach was not sustainable ad many cost cutting only exercises diminished the ability to quickly pivot as competitive positions changed  and the goal was not just to survive, but be prepared for value creating exits that rewarded owners and investors for the risk they undertook.  As it turns out, the goal is common, but indeed the approach does depend on your starting point, and capacity and capability to undergo change.

Assess, Plan, and Act

Before embarking on a cost-cutting mission, it is crucial to take a step back and assess the situation you are encountering- “why you are here” the competitive environment and ultimately what you are trying to achieve.  Here are some thoughts that might help sharpen your team’s thinking about the challenge and the opportunity.

1. Alignment with Core Strategy: Make sure that changes you make and the resulting  cost-structure, supports achievement of your value creation goals, as well as your short term actions necessary to “weather the storm”. 
2. Future-Readiness: Cost-cutting should not come at the expense of innovation and future growth that is in line with your goals and mid and long term value creation.  At the same time, this concept should not paralyze the efforts to get ahead of the real challenges you face.
3. Employee Morale: Dramatic cutbacks can have a cascading effect on employee morale and productivity, affecting your most critical resource.  And at the same time, our experience is that many employees question what took leadership so long to come to grips with these critical matters.

Balancing the Scale: Value Creation and Cost Cutting

To achieve sustainable growth, businesses need to find a harmonious balance between cutting costs and adding value:

• Invest in Talent: Reducing headcount may bring immediate cost savings, but investing in the right talent will yield productivity and cost gains along-with mid and long term value creation.
• Technology as an Enabler: Instead of slashing technology budgets, consider how automation and digital transformation can lead to both cost reduction and value addition.  Also consider how technology can be used to both improve outcomes and help key employees do their jobs better and feel like they really contribute to the success of the business.
• Customer-Centric Approach: Instead of compromising on customer service, explore ways to enrich customer experience. This is a powerful energy source for these efforts and the business
• Data-Driven Decision Making: Utilize data analytics to identify inefficient processes and operational bottlenecks. This approach enables informed decisions, rather than across-the-board cuts.

Conclusion

Cost-cutting is not inherently detrimental; it becomes so when it overshadows the more vital goal of creating value. As a C-suite executive, your role isn’t just to survive the downturn but to position your company for future opportunities. By maintaining a balanced approach between cost management and value creation, you are laying the groundwork for sustainable growth and long-term success.

For a deeper discussion and more targeted strategies on balancing these aspects, just click here

https://pmccinteractive.com/wp-content/uploads/2023/09/20230918-value-creation.pdf

Or reach out directly: pjm@pmccventures.com or  calendly.com/pmccventures-pjm-4