Cutting costs in a downturn: Where to trim?
There is no doubt Singapore business professionals will be tightening their belts in 2012 as the global debt crisis worsens. Given Singapore’s small domestic market, and reliance on foreign imports and exports, we are heavily exposed to the US and European markets.
Service-based businesses can move quickly to cut costs because they do not have to optimise manufacturing processes or control inventory. Here are a few suggestions we have for our clients to reduce costs in 2012.
Renegotiate contracts
Examine renegotiating rates with external suppliers who fulfill large, frequent orders for your business. They will want to retain your business and will be more willing to negotiate on price compared to salary makers in your business. This includes rental agreements. Even if the contract has not expired, a smart landlord will want to retain the tenant through a downturn, because the risk of not securing a replacement is high.
Pool or share resources
You may in fact be able to renegotiate working arrangements with fulltime staff by first checking with other friendly businesses in your industry, and discussing a roster system to share people. This lessens the financial burden for both businesses, without necessarily cutting the salary of the employee. Consider bulk purchasing of stationery among a few businesses to achieve better per unit costs. Daily deal sites are now making group B2B purchasing a reality in many industries.
Cut paper use
Each time paper is touched by a person, it costs money in lost productivity. Cut paper and you will not only reduce toner cartridge and paper costs, but make your people more effective.
Change your model
In 2009 I was running a media company. Faced with the economic downturn, we had to hunt wider and further abroad for projects. This meant we had to pitch on projects which were outside of our skill set. To improve our expertise and competitive position, I set up a private forum.
Through extensive global research I found some of the best developers and IT experts, and invited them to join my private forum. On the private forum I posted tender documents and tough technical questions, and asked experts to post answers.
In return we paid for every post. I would upload a question 6pm on a Friday, and have a thesis ready when I came into the office Monday. We were crowd sourcing ideas, even before the phrase was coined. Downturns are an opportunity to relook at the business, and find better ways of working.
Avoid making cost cutting your sole purpose
The truth is you can make far more money per hour than you can make walking around the business penny-pinching. It is far more productive to use your time creating new ways to bring in more revenue to the company. There comes a point where the effort to save money will out-weigh the saving. It is important to remember that cost-cutting may not deliver a significant saving, and in fact may curtail profits.
Building blocks for cost reduction
Our friends at Deloitte published research years ago on how business should combat a downturn. Here are a few useful measures SMEs should consider.
| Initiatives | Cost reduction | Comments | |
| Occupancy Costs | • Renegotiate lease • Contest tax assessments • Seek government incentives | 5–20% | • Difficult to achieve short-term savings due to leas contract • Savings of up to 20 percent are possible, but only if aggressively pursued; three to five years required for full implementation |
| Travel & Entertainment | • Revise policies and procedures • Improve monitoring and enforcement of compliance | 5–10% | • Additional short-term savings can be achieved quickly (30 percent or more), but are not sustainable |
| Advertising & Marketing | • Revise policies and procedures • Improve monitoring of return on spend | 5–10% | • Although larger cost reductions are possible, these are not sustainable without long-term damage • Firms that maintain their level of marketing activity can gain market share |
| Outsourcing | • Outsourcing aspects of major business processes • Strategic partnerships with vendors | Up to 10% | • Shift to lower-cost provider, who performs function as core competency • Outsourcing not a cure for inefficient operations • Replace fixed costs with variable costs |
| Reengineering | • Elimination of bottlenecks, redundancies, and unnecessary handoffs | 25–30% | • Zero-based evaluation of business processes can result in significant reductions in headcount • Streamlined processes must not weaken risk management controls |
*Sustainable cost reduction that can be achieved by typical firms consistent with long-term growth. Depending on their specific circumstances, individual firms may achieve either higher or lower cost savings than these estimates. Note: These cost reduction estimates are not cumulative. Source: Courtesy of Deloitte Research, Building Competitive Advantage Through Strategic Cost Reduction
Anthony Coundouris is the founder of Futurebooks Pte Ltd. Futurebooks offer affordable incorporation, bookkeeping, business planning and business brokering in Singapore and South East Asia.
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