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Watch out CX leaders - there are only 3.5 ways of reducing costs!

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CX leaders need to be proactive and help their organisations to identify cost reductions that will not affect customers.

28th Nov 2022
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Faced with a profitability crisis or a need to find money to invest, most companies want to sort out their P&L first, and worry about keeping their customers later. That approach tends to produce a corporate death-spiral.

While you may be sacrificing customer happiness in the short term, your competitors may not. They will make it their business to find out where you are cutting costs and how that affects your customers. They will then go in and empathize, taking share from you. You then wind up with a predictable but unanticipated revenue problem, just as your cost-cutting exercise finishes. So, the next round of cost reduction starts. And so on.

Good and bad cost reduction

Unless you are in survival mode, where almost any cost reduction is good, a good cost reduction is one that either improves things for your customers, or simply one they will never notice. Improving things can be as simple as being able to pass on lower costs as lower prices. Process simplification can also lower costs and improve service levels.

Reductions that customers don’t notice concern areas with which they have no direct contact, for example your real estate costs, or the costs of regularly changing employees’ PCs.

Bad cost reduction makes things worse for customers, whether by making a product or service worse, or putting them in regular contact with demoralized employees.

Ways to reduce costs

While this may seem surprising, there are exactly 3.5 ways of reducing costs. The first three are:

  1. Fewer people.
  2. Lower costs of capital, such as real estate and inventory.
  3. Pay your suppliers less.

If you want to be pedantic, the first three items could be more accurately described as less people cost, less capital cost and paying suppliers less. If you move work offshore, you may reduce the cost, providing you let the onshore people go. If you move from an expensive city-center location to a cheaper place on the outskirts, you will reduce your real estate costs if you close the original building.

And the 0.5?

The remaining half a way of reducing cost is by making one-time accounting changes.

You can change the accounting treatment of certain items. You can move your HQ to a low-tax jurisdiction. You can sell your buildings and lease them back. Since your competitors can do the same, it is debatable whether they produce sustainable competitive advantage.

What about the customers?

Many companies currently find themselves needing to reduce costs. It is unfortunately extremely common that the people deciding how to reduce costs have no real idea what they are doing. They do not consult people with the necessary knowledge because they want to keep the projects confidential until they are announced publicly. Unfortunately, this almost always results in initiatives that can't be implemented as announced and may cause customers to become disloyal.

However, because the layoffs and building closures have been announced, they get implemented anyway. This is how corporate death spirals start. If you don't believe me, you have not been paying attention to Twitter recently.

So therefore . . .

If you are a CX leader and know that your company is having difficulties in the current environment, be proactive!

Volunteer to participate in the cost reduction leadership team that you should assume exists. Your reasoning should be simple: you must help your company to avoid what I called ‘bad cost reduction’ above, while helping to identify things that will not affect customers.

Do it to protect your own job. Do it to protect your customers. Do it now.

This article adapted from a piece that was originally posted on LinkedIn

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