A history of past successes, technological advancements, and market advantages can’t protect even the best organizations from shrinking profit margins and aggressive competitors. Sooner or later, every business is forced to reduce overhead and trim operating costs.

While it may be tempting to cut a fixed percentage of costs across the board, the approach is never a true long-term solution. A rigorous exercise in planning that aligns overhead costs with long-term strategic objectives is the key to sustained cost-management success.

Linking reductions to strategy

Cost cutting for the sake of cost cutting often spells disaster. Frequently it means going after the most visible targets by slashing services, shutting down programs, or cutting back on customer support. Such aggressive moves, while quickly affecting the balance sheet, can carry hidden long-term liabilities, such as compromised employee morale and eroding customer satisfaction. It can also result in discarded resources that may be strategically important to the future of the business.

In contrast, a more strategic approach to cost reduction will allow effective cutbacks in overhead without destroying company value. Only by gauging how overhead activities support a business’ priorities can genuine inefficiencies be driven out. Decisions must be consistent with a business’ core strategies and with the best interests of customers. Such efforts can accomplish the dual goals of preserving essential business activities and creating a culture of efficiency.

Assessment is first step

A strategic review of overhead costs begins with some answers to questions about capabilities.

• What is the value created by each organizational unit, product or service offering, and company activity?
• How does the company seek to deliver that value? And how often are those particular capabilities used?

Careful scrutiny of all activities will determine which ones to keep, which ones to scale back, and which ones to eliminate. All operations must be reviewed to determine those that are “mission critical,” with a subsequent focus on creating efficiencies within those strategically vital operations.

When crucial activities are identified, cost-cutting efforts can zero in on activities that don’t support growth objectives, thereby ensuring adequate resources for support functions that clearly add value.

Create a culture of efficiency

Sustaining cost reductions into the future requires acceptance and support within the workplace. It requires a permanent culture of efficiency and a commitment to ongoing change. Because any cost initiative brings discomfort, candor throughout the process is in an organization’s best interest.

Executives must demonstrate how cost-cutting efforts are linked to strategy, rather than simply being a contest of dueling numbers. They should help employees understand how reshaping capabilities help the company sustain, survive, and grow. The overall message should focus on eliminating waste and conserving resources so that savings can be reinvested into critical business assets like employees or technology.

Executives must also solicit feedback and support from management. Involve them, as well as employees, in identifying those business units or activities that are potential candidates for cost-cutting. Getting broad input is an ultimate means of integrating the cost-containment philosophy throughout the organization.

A powerful approach, done right

Sales numbers are only one measure of success; reining in overhead costs and creating value for customers can make for greater success, even in the face of lower sales. When well-designed and firmly planted in a sound strategy, an overhead cost-reduction program can become a value-creation program that leads to a sustainable edge in the marketplace.