Focus on Cost Optimization Over Cost Cutting – Even in a Recession

Steve Niesman is a member of the Forbes Business Council. This article was first published on Forbes.com on March 17, 2023. Here is a link to the original article.

In the previous installments of this series, I introduced a framework for digital transformation and growing your business called P.R.I.C.E. The five focus areas for this framework include people, revenue, innovation, cost and experience.

Now let’s focus on cost. When people think of this topic, they often think it means cost cutting. However, I’ve found the better way to approach cost is to focus on cost optimization. It’s still important to focus on growing revenue and profits, growing your people and providing your purpose in difficult times.

All of this relates to optimal cost, especially considering the ongoing imbalance with workers. We’re still competing for talent, even in the face of a potential recession, and one way to minimize costs is to minimize turnover. The hidden costs of losing productivity, recruiting, training and other related factors all figure in. So, cost focus continues to include how you focus on people and how you give them purpose and meaning.

How Employee Retention Can Add More Value

I have mentioned using automation as a tool in previous installments of this series. It applies here too. Automation can free people up from repetitive, mundane tasks so they can focus on adding value to your business and enhance job satisfaction. Thus, we begin to move away from the idea of cutting people and toward using the talent we have to their greatest effect. This is key as you work to fill vacated roles and avoid overwhelming existing talent in the process.

Many leaders worry that orders will slow down in a recession, and cost-cutting or layoffs can feel like a natural reaction. But consider this: McKinsey recently published research showing that the companies focused on both people and performance had consistently higher financial performance and fostered bottom-up innovation.

In my view, focusing on people and performance starts with automating the lower value tasks so that you have more time and resources to develop new skills. Everyone needs time. There could come a point in the competitive landscape where upskilling people is table stakes for employee retention and generating financial performance, and we’re probably already there.

Why Digital Transformation Is Not the Magic Panacea for Cutting Costs

There are ways to protect your margins during a recession, but it’s not about cutting costs. It’s about keeping costs in check by increasing efficiency. Through helping businesses get started with automation and other digital transformation tools, I’ve observed that automation can help companies add more value and perform better for customers at a time when competition is more intense, and into the future. Here’s what that means right now.

Whether you’re looking at gross margin (product and labor costs) or net margin (gross margin less sales, general and administrative costs), you can contain costs by using technology to scale your business — often more efficiently than what is possible by adding more people. It’s about making the most of the team you already have and only scaling back if your level of efficiency warrants it. For example, you could decrease your sales team from 20 to 2, but that may not help you as much as implementing automation tools that give your team more time to work the leads in their pipeline.

On the other hand, as chip manufacturers move operations back to the U.S., they’ll likely need to find a way to do this with fewer workers given the fact that American labor will be more expensive. This can be done in a few ways. First, they will likely automate much of their supply chain to get a better forecast for demand and supply. They could also automate their manufacturing processes to ensure more uptime, predictability and service.

However, supply chain management and other cost optimization measures are not always about needing fewer workers. I still come back to efficiency in most cases. For example, an accounting firm can use automation to make their people more efficient so that they can serve more customers in the same amount of time or less.

Getting Started with Automation

Ultimately, technology has to work for people—not the other way around. Look for what will have the greatest impact and possibly a few quick wins to provide some positive motivation as you work toward long-term goals. Base your approach on small incremental steps, aiming for continuous improvement that goes beyond reacting to any immediate situation.

If there is one pitfall to avoid when implementing automation, it is around change management. Without a plan and proper communication, you could end up implementing technology that meets resistance or doesn’t get used — thus causing your efforts to fail. For example, if your employees do not understand how these changes will impact them, they could become fearful of losing their job. If that happens, you could end up losing employees that you had every intention of keeping. On the other hand, if you involve your people from the start, it will be much easier to get their buy-in.

Every business will have its own unique set of requirements based on industry, regulations, customer base and differentiating characteristics. There is no one size fits all. That said, I can think of two general rules of thumb.

First, start with strengthening your core and expand from there.

Second, apply automation to manual tasks that are repetitive and can be improved with fewer errors. Robots can repeat what has been done before, without errors, but they cannot understand a customer’s tone of voice or solve a problem they’ve never encountered. That’s where your employees can add the most value. Only people are capable of finding creative ways to add value and build or strengthen relationships with your customers.

That’s why it’s usually not about cutting. It’s about gaining efficiency while also giving your employees more valuable work that they enjoy doing. It’s about optimizing inputs by better managing your supply chain, scaling more efficiently and reducing business waste. As a result, you reduce your costs and increase your margins as all of these efficiencies start adding up across your organization.