Five Ways to Cut Costs

In the fall of 1998, Merrill Lynch & Company faced a crisis in its fixed income business, which was rattled by a financial meltdown in Russia. In response, the venerable financial services firm (recently acquired by Bank of America) made deep cuts, slashing its payroll 5 percent.

When the market bounced back the following spring, Merrill was caught flatfooted: It didn’t have the human capital to reinvigorate its business. The company was forced to poach talent from other firms—an expensive gambit.

Shortfall shell shock

The current economic turmoil has battered corporate revenues with shocking swiftness. Executives are confronting tough decisions on the future of employees, departments, and facilities. The pressure to cut is significant. Yet as the Merrill Lynch case illustrates, such maneuvers entail risk. Layoffs and across-the-board budget cuts present easy ways to calculate expected savings in the short term, but they can haunt the bottom line over the long term, says business consultant Adam Hartung, author of Create Marketplace Disruption. “If you didn’t make the work go away by redesigning your business processes, the work remains and you’ll eventually have to get it done some other way,” Hartung says.

Pink slip alternatives

Effective cost cutting requires creativity and imagination. During flush times, excess waste accumulates in almost every corner of your enterprise, much of it hidden from view. “In good times we don’t necessarily scrutinize as tightly as we should, says Daniel Bertrand, interim co-chief technology officer of EDS, an HP company, and an EDS Fellow. Unexpected cost savings often lie hidden in an organization’s assets, he says. Here are five:

1. Software licenses. Application software licenses can total tens of thousands of dollars (or more) depending on the size of your organization. Inventory all applications—who uses them and for what purpose—to determine which licenses and applications are underutilized, and then work with your provider to make the necessary adjustments.
2. Lease agreements. Scrutinize hardware and equipment leases to capitalize on potential cost reductions. Monitor lease cycles and renegotiate agreements with your suppliers to prioritize investments and maximize expenses. Likewise, take inventory of network connections linking branch offices and subsidiaries. Eliminate underutilized connections.
3. Cost-cutting campaigns. Organize specific cost-cutting campaigns enlisting frontline employees to identify areas of waste. Campaigns might target documents and reports, for example. “People often produce reports that are no longer useful to the organization,” says Jeffrey Margolies, founder of GemmaPartners consulting.
4. Maintenance agreements. Work with vendors to reassess maintenance contracts on your IT equipment—routers, switches, servers, and printers—to make sure your needs are covered and your investments are focused appropriately.
5. Service level agreements. Reassess service level agreements. Companies can often generate significant cost savings by dropping penalty clauses or lowering service level benchmarks. For example, data service agreements might reduce a 99 percent uptime requirement to 95 percent. Ask your outsourcing service providers for flexible pricing.

Strategic cost management during an economic slump can put an organization in a more competitive position for the next upswing. While others are slashing budgets, successful organizations are using focused investments combined with creative financing and delivery options to deliver cost reductions for the downturn while laying the groundwork to exit stronger, more efficient, and competitive when the economy recovers.

But the process must be done with an element of rigor and hard-edged analysis. “Cost-cutting laundry lists are easy to develop,” Hartung says. “Somebody can give you a list of things you don’t need. The question is how do you really know that you don’t need them?”