Managing Costs for the Downturn…and the Upturn

December 10, 2008 – 12:00 pm by Bryan Green

As the pressures of an economic recession mount, high tech companies’ heavy investments in growth begin to take on greater risk with fewer dependable rewards. Organic growth declines, both within direct sales and partners, and the cash needed to expand into new markets either directly or through acquisition is held at a premium. The dampened revenue estimates require that companies look inward rather than outward to meet their profitability standards. Therefore, the focus naturally turns to cost reduction and cost avoidance. Managers primarily focus on three main areas: 1) Centralization & Sharing Services; 2) Utilization of Cheaper Alternatives; and 3) Optimization of Resource Alignment.

While cost-cutting is almost certainly a necessity, the problem with this approach is that cost reduction alone never leads to long-term profitability. As a result, this article will discuss each of the three focus areas listed above, and propose strategies for executing cost-cutting measures with an eye toward not just managing the downturn, but also preparing for the upturn.

1) Centralization & Sharing Services

In good times, companies make every effort to push the decision-making out to the field. In lean times, they pull it right back in. With slashed budgets, pared down workforces, and an increased emphasis on cost reduction from above, managers naturally want more control over their decision-making process. This entails identifying and eliminating redundancies within systems and processes across the organization. The goal, however, is not simply to cut costs but to also improve quality, both as perceived by the customer and by the relevant business units.

It is not uncommon for businesses to have parallel teams in their headquarters and other business offices carrying out similar processes in similar systems. The ability to have one team perform these tasks for all geographies, product types, and verticals is an opportunity to reduce costs and standardize business processes. However, the cost reductions that can be achieved this way have to be weighed against the quality that the future state will provide. Consolidating helpdesks, for example, might reduce cost, but if it also reduces the quality of the support service, it may undercut customer satisfaction. As a result, this consolidation measure may ultimately have a negative long-term impact on the business.

A clear example where nearly all companies can both reduce long-term costs and generate long-term business benefit is in the areas of data management and business analytics. Despite the explosion in the volume of data being captured by most companies, few have been able to capitalize on it. Much of this is due to the fact that the data resides in disparate systems scattered throughout the company. Bringing this data together into a consolidated database and dedicating some resources to analyzing it can not only help to reduce costs, but can also provide information crucial to optimizing future revenues and resource alignment.

When resources are stretched thin, attempts to centralize systems and processes can be difficult to undertake. But with the long-term benefits they can generate, it is imperative that organizations pursue them.

2) Utilization of Cheaper Alternatives

When consolidation doesn’t generate enough cost savings, companies are forced to look outside for cheaper alternatives. Traditionally, this meant identifying manual, non-core or low value-added processes and either automating them or sending them to low-cost countries to be completed. This approach may still be available as a short-term solution to reduce costs, but most of the low-hanging fruit has long since been picked within high tech companies. Unfortunately these offshore relationships have never solved the main problem facing companies: the need to do what they do better.

But that is now changing. Offshore service providers have been increasing in sophistication and experience at an exponential rate. They can now offer not only cheaper alternatives, but also strategic assistance based on their many years of working with large clients. As a result, forward-thinking organizations have begun to shift from BPO—business process outsourcing—to sustained, collaborative relationships with their offshore partners, or BOP—business outsourcing partnerships.

This has changed the dynamic of the offshore relationship in a number of ways. First, the ability of an offshore partner to understand and integrate with a company is essential. They will be called upon to not just complete tasks, but also re-envision them. Second, offshoring opportunities must be evaluated not just on the ability to complete the work today, but also on how they can scale up to complete the work required when the economy rebounds. Finally, companies must invest in training their existing workforce on ways to govern and manage outsourced work more effectively. Getting the most out of the relationship with offshore partners will become an essential priority for all organizations.
 
3) Optimization of Resource Alignment

The previous two focus areas are primarily driven by cost reduction. A strategic organization, however, will remain focused both on generating short-term revenues and preparing the organization to capitalize on opportunities when the economy rebounds. Optimizing a company’s resource alignment can generate both cost savings and increased revenues, within even the toughest markets.

There are three key areas where we see strategic alignment opportunities in most organizations. The first means of aligning resources focuses on distribution channels. Management must analyze the existing market and determine which products will sell, under what terms they’ll be sold, and which customers will be most likely to buy. Then they can actively support the distribution channels and partners they believe will bring in the best returns. Support entails not just allocating more resources to those accounts, though. It means actively working to make collaboration easier and reduce your partners’ costs of doing business with you. This will not only strengthen your core sales pipeline, but also your overall partnership. 

It can even lead to benefits in how products are developed and services offered. Partners who work closely together have a better understanding of what works and what doesn’t; they improve their ability to innovate collaboratively. This is related to the idea of establishing BOPs, but focuses more on developing a process for your customers and partners to provide feedback and contribute to the next generation of products and services you will offer. We have seen this type of close partner collaboration lead to small changes that generate large increases in profitability, such as in how products are bundled and how lease terms are structured. In each case, the close integration with the partner led to discussions that wouldn’t have happened otherwise. While the instinct of many managers is to guard their turf in tough times, the opposite is often what is called for: opening oneself up to new feedback and partnerships to infuse new ideas, improve existing products, and hopefully enter new markets.

Finally, from the IT perspective, a move to Enterprise 2.0 or SaaS (Software as a Service) should be emphasized. Business units are likely already moving in this direction, as the software and capabilities do not require a heavy IT investment and they can be implemented cheaply. At the same time, monolithic IT projects won’t be feasible due to organizational budget constraints. One large high tech company just ended a major IT initiative on the grounds that it was not only too costly but also that it wasn’t able to provide the IT agility they anticipate needing over the next few years. This was a prudent move on their part. In uncertain times, flexibility becomes essential. By moving the entire organization toward Enterprise 2.0 and SaaS solutions, management is positioning the organization for the future, whatever that future may hold.

All organizations are feeling the pressure of the pending recession. In the short-term, the quickest and easiest way to maintain profitability is to control costs. But there are diminishing returns when businesses focus only on cost control. In the end, profitable companies need to continue to grow, or at the very least continue to position themselves so that they can grow more rapidly when their buyers once again open up their pocketbooks. Companies can’t afford to get locked into a cost-only focus. By strategically positioning themselves for the upturn, they can both withstand the recession, and profit when it ends.

Contributors: Sanjay Shitole, Kristie Pham

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