Though markets have begun to rebound from their post-lockdown depths, many companies are still putting a laser-focus on efficiency.
The most efficient company is the one that gets the most in return for what it invests. So, efficiency gains can come from one of two places: lower costs or higher revenues. Because sustainably higher revenues have been hard to come by for many companies in the last couple years, many have put an emphasis on cutting costs.
But as companies like Boeing have learned, not all cost-cutting is created equal. Some costs—say, aircraft safety expenses—are so core that cutting them endangers the health of the business as a whole.
As Vox, the New York Times, and others have reported, Boeing is a case study in how not to reduce costs in search of efficiency. Underinvestment in engineering talent and safety protocols (in the name of pumping up stock prices) led to fatal crashes in 2018 and 2019, and more recently, the mid-flight detachment of a door plug from an Alaska Airlines 737 Max 9.
Ultimately, efficiency isn’t just about cutting costs. It’s about cutting costs without reducing quality.
As your company embarks on its own efficiency initiatives, here are some steps to consider.
4 tips for reducing costs without sacrificing quality
1. Define your core value metrics (and measure them accurately). This may sound straightforward, but particularly in more tech-heavy industries, defining and measuring core value metrics is not always common practice.
For example: A company like GrubHub makes its money from food deliveries—and it pays a certain amount of money to support the software involved in facilitating those deliveries. So, it would want to know its cost per delivery—or per 1,000 deliveries, or per delivery within different regions, or however else GrubHub deems it important to see.
Companies are often surprised when they see their true unit costs—and reducing their costs often involves clearing away waste that has accumulated unchecked over the years. Identifying this waste is much easier once you define your most pressing unit costs and understand what contributes to them.
2. Look for environmentally impactful efficiencies. Companies with large real estate footprints incur substantial utility (water, electricity, gas, and arguably, WiFi) costs. Taking measures to reduce these costs not only avoids impacting quality—it also improves your company’s environmental profile.
Snacks giant Mondelēz International, for example, tracks and reports on its water usage, setting year-over-year efficiency benchmarks.
3. Eliminate nonessential vendor contracts. It’s easy to let vendor contracts pile up. Conduct a careful audit of which vendors are contributing essential business value, which aren’t, and which you can afford to cut loose.
4. Avoid inhumanity at all costs. In other words, avoid the school of thought that says, “Profit matters infinitely more than anything else.” It’s the mindset that caused Boeing to outsource too much of their manufacturing, undervalue their employees, induce brain drain, reduce product quality, and ultimately, face spectacular failures.
You can’t always make everyone happy, particularly when cost-cutting is essential to the survival of your business. But you can distinguish a cuttable cost from an essential one, you can prioritize employee experience, and you can safeguard the core value that made your business necessary in the first place.
Ultimately, cost-cutting exercises should really be about understanding how every dollar you invest contributes to business value. It’s not always easy to draw a direct line, but striving for accurate measurements, credible value statements, and human business practices will give you the best chance of emerging better off than when you started.