According to research from CFOShare, more than 80% of organizations aiming to cut costs in 2020 and beyond will fall short in that effort. In this conversation with SupplyChainBrain editor-in-chief Bob Bowman, company founder LJ Suzuki explains why that’s likely to occur. He also provides some tips on how to avoid common financial pitfalls, and set up your company for financial success in uncertain economic times.
SCB: Your data shows that more than 80% of companies will be focusing on cost reduction in 2020 and beyond. Why is that?
Suzuki: Everyone’s been whispering about the recession, and I don’t want to come out and say one is coming, because the truth is that nobody knows when. However, in a time where we’re moving from a growth economy to one that’s beginning to contract, the focus naturally shifts from sales and revenue growth to cost savings. The reason for that is twofold. Number one, sales opportunities aren’t as abundant. And number two, as sales pressure comes down, there’s more of a focus on fixed and variable costs, which aren’t being covered by as much revenue. The ability to increase profits by focusing on cost savings becomes more of a priority in a contracting economy, or when you have declining revenues, than when you’re trying to grow your company and the ROI is more focused on growth.
SCB: Is this trend originating within the executive suite, or are companies feeling pressure from shareholders?
Suzuki: It’s coming from the top end of the organization’s stakeholders — some shareholders, but also from the capital markets. Lending is pulling in a bit, and equity capital is contracting as people take a more defensive stance. And when management has less access to capital, it can’t invest in growth like before. That has them focusing their attention on cost savings.
SCB: But money is still relatively cheap. We don’t see indications of a significant interest-rate rise in the near future, but there’s still a pullback in capital availability?
Suzuki: Especially on the equity side, yes. Interest rates have a direct effect on lending, which still seems relatively abundant. But if you’re an early-stage startup relying on venture capital, or a mature company looking to do a partial or full exit to private equity, you become a lot more defensive and measured about the investments you’re making.
SCB: We’re talking primarily about privately held companies here?
Suzuki: Yes. That’s the customer and investor base we’re working with. That said, generally speaking, public companies always have an advantage when it comes to fundraising because they have extremely robust controls in place. Their financials are well known, they have established investor relations departments. You see where Apple just did another round of debt to the public markets. That’s the type of availability of lending capital that a private company will never have.
SCB: Public companies aren’t under the thumb of venture capitalists.
Suzuki: Yes. And in general, people just have a lot more confidence in the quality of their accounting and the information that they release to the public because they’re subject to SEC regulations.
SCB: According to your findings, more than 80% of these companies will not meet their goals for cost reduction. Why is that?
Suzuki: There are a number of reasons for it, but I’d say the biggest is that people often wait too long to make these plans. They’re being reactive to market conditions instead of proactive. One thing we always say is that you need to plan for the recession before the recession hits, because once it does, people often get paralyzed by the rapidity with which markets are changing. They spend so much time reacting that they can’t see the forest for the trees. And they miss a lot of opportunities, especially when it comes to cost reduction.
SCB: What kind of cost reductions are companies contemplating? Where are they seeking savings?
Suzuki: The first thing they do is undertake reductions in force. When there’s a downturn, there’s usually a first round of layoffs where you’re trimming the fat and rightsizing the work force to match market demand. Often that’s a very productive action for companies to take. Sometimes they don’t go far enough, so they have to do a second round of layoffs, which is extremely demoralizing to the remaining staff. Then you get a talent drain, where your good staff gets scared or feels the culture is being eroded, and they start to leave. That’s what companies need to focus on avoiding.
SCB: But you also have to be careful not to lay off too many people, don’t you?
Suzuki: Of course. Because then you have to scramble to rehire them, and that’s expensive. Hiring and training are very time consuming. Often you miss opportunities on the rebound, once the market starts growing again. So one thing that we advise people to do when they’re considering a reduction in force is consider alternatives to layoffs of their truly talented employees.
SCB: What kind of alternatives?
Suzuki: One thing the millennial workforce embraces is the opportunity for a reduced workweek in exchange for reduced salary. A lot of people are willing to take that tradeoff in order to spend more time focusing on their families or personal lives, or pursuing a hobby or volunteer work. Another opportunity is considering furloughing your good employees, saying, “You told me you always wanted to travel the world for six months. I’m going to give you that opportunity. You can keep your insurance while you’re doing it, but we’ll pay you only a minimal salary, just to respond to emergencies.” There are ways you can reduce your monthly payroll spend without losing those employees.
SCB: What about investments in technology that promise to reduce costs over the long run? Are companies going that route?
Suzuki: Absolutely. That’s always a good route to go whenever you’re in a downturn. An example of investing in technology is implementing an ERP [enterprise resource planning] system, so you won’t require as much manpower to do routine back-office tasks. Or investing in some form of process automation, whether mechanical in nature for a factory, or digital in terms of software. That sets you up for a scalable process on the rebound. It saves you money in the short term, but also allows you to grow when the markets start growing again.
SCB: Also, you don’t face the need to bring back all the people you’ve laid off if you’ve implemented automation, robotics and the like, right?
Suzuki: Exactly. And you can base decisions about layoffs on who can learn the new technology quickly, embrace it and run with it. Those are the people you want to keep on your team.
SCB: What are the signs that companies look for in determining how the economy is going?
Suzuki: The thing that has the most direct impact is their deal flow and revenue from their customers. That’s something you should never stick your head in the sand about. Another early indicator might be if accounts receivable starts getting larger, and your customers are pushing out payments. That could be a sign that they’re experiencing weakness. Besides that, every business owner should be keeping tabs on the macroeconomic landscape — basic things like GDP and jobs reports, as well as the trade deals that are going on right now. That way you get a sense of the general temperature of the market.
SCB: Also things like inventory buildup, changing customer sentiment, drops in trade flows?
Suzuki: Definitely. One thing I always encourage people to do is keep track of customers’ inventory levels — especially if you have a few major accounts that are very important. Also, in routine supply-chain meetings with buyers, ask them about their inventory position. What demand are they seeing? By being proactive, you might be able to spot a downturn in their market before they even spot it.