Business Cost Reduction Strategies

This is one of the key actions that can eliminate IT infrastructure costs and save money on training. According to Flexa, 63% of enterprises reported using cloud-managed service providers to manage public cloud use. Additionally, 78% of enterprises expect to have a hybrid/multi-cloud environment by 2021. At the same time, managed security services are a cost-effective alternative to implementing in-house security teams and systems. In most cases, outsourcing is an excellent way to reduce IT operating costs. This is most evident in the tech industry, but many other companies turn to it as well.

While many people use offshore as a strategy, I am going to go against the grain to say it is overused and that other techniques can often be more effective. Yes, I believe there is work that can be effectively performed offshore at cheaper rates. But, I believe too many organizations view offshore savings as a math exercise. For example, if offshore rates are 30% of home country rates, ROI’s are calculated as if every position moved to the offshore location saves seventy cents on the dollar. While this may be true of some work, there are many jobs which cannot be done as effectively offshore and I have seen several examples where the offshore cost was higher than the home country cost. In addition, there can be significant travel costs which are usually ignored when calculating ROI’s.

But first, it’s vital to understand the different types and components of procurement costs and identify why these expenses occur. You can no longer look at your expense categories the same way you once did. Transitioning from an hourly rate to a total cost approach recognizes not only the dollar amount you’re spending, but the maintenance strategies and once-hidden costs that affect your bottom line.

Things like inventory monitoring, order prep, and data interpretation take time. That’s time that your employees can spend in other parts of your business. By automating certain processes, you’ll free employees up to focus on their core duties. Getting products to the end user is one of the biggest and most expensive challenges your warehouse will face. Trying to figure out how to reduce transportation costs in the supply chain means taking a long, hard look at how you’re sending orders currently.

The Advantages Of Reducing Inventory

Most of the time, cost-cutting measures tend to be harsh compared to cost reduction. Because procurement costs provide a straightforward and traceable way to measure the performance of the entire procurement process and the business in general. Independent Service Providersto streamline processes and achieve significant cost savings.

it cost reduction strategy

These resources are pooled together, allowing businesses to eliminate the need for extra space during high-demand phases. This also minimizes the need for employees to spend as much time or money maintaining the systems. Companies save on hardware as they no longer have to store expensive and cumbersome equipment in their buildings. It may also be time to consider outsourcing activities or work groups. The case for handling activities in-house usually rests on the judgment that the business has unique needs.

Outsourcing It Staff And Services

As a result, a large number of organizations adopt a common approach to outsourcing to 3rd party providers as a measure to control cost and de-risk. They grow frustrated with weak sales numbers and a marketing plan that they don’t feel is working so they fire salespeople and gut the marketing budget. This is shortsighted because they are shutting down their primary source of cash flow. A properly executed marketing strategy generates quality prospects for salespeople. Competent salespeople generate new revenue by converting prospects into customers. If you were to follow the traditional cost savings route, the process would likely involve you making a tender, negotiating, selecting a new supplier, implementing, and then maybe realizing cost savings. The challenge with this approach is that it takes time and significant resources to do this.

it cost reduction strategy

The process also includes ensuring compliance after the signing of the contract, and documenting any advised or mutually decided amendments made to the contract at any point during the partnership. The process and activities persist through the lifetime of the contract, and help both parties ensure that terms are met, while continuously improving upon their partnerships and terms. During the lifetime of the contract, companies also attempt to improve their supply chain performance, reduce costs, mitigate various industry risks, address major challenges, and advance towards business targets. Companies often implement cost reduction strategies such as the ones listed below to help keep pace with the changing costs and market dynamics. The sudden upsurge of demand in the growing retail sector, has led to an increasing need for cost reduction strategies and efficiently handled partnerships. A renowned retailer in the APAC region struggled to maintain high productivity and profitability due to a sudden decline in savings, rise in expenses, and failure of partnerships. To understand what factors were causing high losses and reduced savings, the company approached SpendEdge and sought to leverage our expertise in contract management and the development of cost-reduction strategies.

Why Employ A Cost Reduction Strategy?

Overhead that increases the effectiveness of your direct activities should be evaluated against a strict cost/benefit standard. Simply ask whether the measurable improvement in effectiveness pays for itself. You can also rank each overhead item from most effective to least and draw the cutoff at the point you consider acceptable. This same standard should be applied to many activities not traditionally recognized as overhead. Line supervisors and senior executives may not like being classified with finance and HR staffers, but for this purpose, they should be. Second, match the kinds of opportunities you examine and implement to the degree of cost reduction required.

  • This captures formerly maverick spend, keeps buying compliant, and reduces the workload of the procurement team.
  • While it may be simple to stick with one vendor across the board, companies often pay premium prices to do it.
  • All administrative departments, efficient ones included, have unresolved personnel issues.

Another way of maintaining costs in IT services is by looking at your products and contracts. If you are not using a service to its capacity, consider reducing or suspending usage. Alternatively, look at other solutions that might integrate more closely with products and services that are being used. It is essential in this respect that you review your contracts carefully as you want to minimize any penalties or fees that you might need to pay for early termination. We’ve compiled a list of seven IT cost optimization strategies CIOs can apply to any framework to help reduce costs within their organizations while still enabling business operations.

How Much Should Your Company Spend On It?

Cutting or stopping projects or services where costs have already been spent or incurred are of limited value. Cutting things that can’t be restarted, that have already been invested in or are ready to deliver will hurt when the organization is ready to accelerate again. It’s often said that “you can’t cut your way to growth,” but you can cut your way to survival. There are many reasons why an organization may need to make immediate spending cuts to survive, from natural disasters and terrorist attacks to a tanking economy or an aggressive new competitor — or a global pandemic. Providing software solutions that take the complexity out of IT management, because we know the success of your business depends upon managing IT more effectively, efficiently and securely. There a number of ways the budget-conscious CIO can cut expenses without losing headcount. Virtualizing your databases can help your enterprise IT save on storage by sharing physical resources.

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However, overemphasis on short-term wins risks missing the long-term opportunities in bold strategic bets that deliver long-term IT cost transformation. If not planned carefully, IT organizations might find themselves in a difficult situation, with limited runway to grow and play offense after a sustained period of defensive cost reduction. Simple’s expense reduction experts perform your comprehensive cost reduction analysis with no guarantee of compensation. Imagine what you could do with all that money added to your bottom line… Upon completion of the cost reduction analysis, Simple Business Solutions meets with you to review the identified cost savings and present a plan for implementing the cost reduction strategy recommendations. If you operate on a 25% cash flow margin, then every $1 in cost savings is worth the same as $4 of revenue.

Controlling personnel costs can be challenging when your talent needs change from one quarter to the next. If you have enough staff to cover your busy periods, you’ll have too many during slow periods. You’ll have to keep paying your IT employees, even though there’s nothing for them to do. If you have enough employees to handle the slow periods, they’ll be overworked during busy periods. Projects that could transform the business, like the development of innovative technologies, could be well worth the money. Projects that just support business operations, like upgrading internal technologies, could be put on hold.

Change The Process

Companies are continually looking for new ways to stand out from the competition. With the advent of the internet and the more recent growth of the smartphone market, the cost reduction strategies business way businesses deal with their customers is changing. Markets as a whole are no longer the static environment they used to be, and the pace of change is only increasing.

it cost reduction strategy

Organizations and departments trying to cut administrative costs often leave management untouched—missing out on big potential savings. Gartner recommends taking a structured Offshore outsourcing and programmatic approach to cost optimization. Research shows that organizations that continue to invest strategically in tough times are more likely to emerge as leaders.

Procurement Research Reports

CFO’s love saving money and they can be supportive in the cost-cutting process. They can be very helpful in looking at a cost-cutting initiative and providing an objective analysis of the real costs that are likely to be saved upon completion. In addition, cutting costs often challenges long-standing ways of doing business and the CFO can be a key advocate when you need to fight an internal battle.

Unfortunately, too many senior executives do not understand this and look for the offshore silver bullet when they want to cut costs. I believe a far more effective strategy is to let your managers use offshore only where appropriate and incent them to reduce personnel costs in other ways. It’s also important to note that cost cutting doesn’t necessarily mean completely cutting a cost. Optimizing productivity actually reduces costs, so it’s important to measure productivity. Today there are apps that allow companies to monitor the productivity of employees as well as time spent on different work and projects. One of the first places to start for cost reduction opportunities is by reviewing the profit margin on the products or services you are offering. Determine which of your products or services are bringing you the highest profits.

Focus On Profitable Products And Services

This means investing in the right FM provider—one that completes work orders on time, communicates effectively, and prioritizes preventive maintenance. Costliest aspects of running a business, regardless of industry—especially if that business has multiple locations. In the never-ending quest to save money while still ensuring your facilities are well maintained, you might look to make cost reductions by searching for the FM service provider with the lowest hourly rate. Establishing and communicating an easily understood imperative will help to ensure buy-in at all levels. One approach is simply illustrating the unsustainable environment of increasing costs relative to flat to declining revenues .

The only thing worse than being forced to personally implement administrative cost cuts is being forced to implement ones you know you will regret in a month. Both experience and research indicate that idea generation improves through multiple iterations.

The manufacturing process should be changed without affecting product quality or nature. The reduction measures should not affect the processes and product quality. Cost reduction must involve reducing and not cutting out costs entirely. With analytics and artificial intelligence tools, companies have a highly granular view of activities that drive cost in business. When paired with internal and external benchmarks, this enables them to identify opportunities to unlock trapped value.

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