Monday, September 24, 2007

The Cost-Cutting Conundrum

It is all about ROI.

Cost-cutting, increasing efficiency, keeping things simple... and at the end of it all meeting the ROI - is an ubiquitous corporate challenge. But in most cases the hidden-costs of 'cost-cutting' and complexities of the 'simple' business provide a skewed image of the reality.

Corporates that operate on a consistent theme (read pressure) to cut costs actually have their spending focussed on short-term, tactical projects. This potentially leads to a lack of a "strategic fit" and hence majority of such projects end up with higher costs, and potentially increased complexity.

Instead, Enterprises should identify the areas where cost cutting could be mortgaging their future as a consequence and block them from being "crunched". For example, if resources are budgeted for a next-gen product but not on migrating old customers to the next-gen, will eventually lead to a support nightmare and a serious implication of maintaining two different product cycles. Thus adding to the cost, eventually.

Another excuse for management to not allocate resources is on Projects that do not lead to Direct Revenue. Some executives, like to call it is "cost-centers". Examples of such could be - Security Infrastructure, Developing an Integration Platform etc. Not investing in such initiatives may in the near-term prove to be profitable. However, delaying improvements in these areas could cost far more in the long run.

Some of my key observations and thoughts about cost-cutting are:
- Save recurring costs. Maintaining an old system that is under-utilized and/or not adding value can be costlier than spending some more resources to revamp.
- Full-time vs Contract. There are some functions, which are critical, but required for a specific time frame. For example, for a non-UI based organization, having a UI designer full-time may be a recurring cost. Rather, companies should evaluate operating with a contract position.
- Reduce Redundancy. Many corporates work in islands of functional areas. If there is an information that can be consumed by more than one function, then all efforts should be achieved to minimize redundancy of the information source . Areas of reusable components - information, resource, system - all that can be re-used should be identified and allocated with a common budget.
- Having a common goal. All functional areas should be encouraged to work on a common operating principle. This will tremendously help organizations to streamline cost goals and work collaboratively to achieve them.

Caution - any such organization wide theme (be it cost-cutting, efficiency improvement, managing simplicity) involves change. If all functional areas are not aligned together to embrace the change, then this will lead to one more wasted effort!

Before you make any judgment, think of the cost-cutting conundrum - are you really saving company some money or is it the other way around. The later affirmation could be very dangerous!

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