Tuesday 15 December 2015

Saving Money, Destroying Value

In tough economic conditions, most organisations cut costs and trim unnecessary expenses.  From observing my clients, this needs a great deal of care and understanding if it’s not to “backfire”.

Organisations risk causing the very event they wish to avoid - the destruction of their business - by not understanding what creates the value of their business.  “Value” is what attracts customers, and means different things to different customers.  For some, it’s the lowest price, for others it’s service, whilst some may come because of another “loss leading” product/service which induces them to use your profitable products or services.

The first costs to be cut are usually:
  • Advertising
  • Equipment replacement
  • Travel
  • Training
Then come the “unprofitable” or “loss-making” products/services.  As I mentioned, these may be what actually bring the customers in.  Cutting those may result in having to make even more drastic cuts elsewhere to maintain profitability in the face of declining revenues (brought about by cutting the very things that attracted customers).

Equally, when you cut headcount, are you cutting the person/people with the vital customer/product/process knowledge that attract your customers?

One global bank has been scaling back its business and selling off “unprofitable” operations to reduce costs (read “increase shareholder value”).  They’ve sold off retail banking businesses, but kept the “corporate” business in certain countries. Companies need to pay salaries into bank accounts and value having employee accounts at the same bank.  Given the scale of competition in most countries, it may not be the best idea for the bank to close its retail business (unless they’ve agreed to maintain employee accounts).  That bank’s share price has steadily declined over the past two years, despite their cost-cutting.  It may not be related to the sale of those businesses, but the strategy isn't working…

The key is knowing what creates value for your organisation or business.  The way to find this out is to talk to your front-line staff and customers.  Whatever happens, don’t make decisions without this crucial information.  Don’t assume that you really know what the customer wants.

We have a tendency to look at the list of costs, identify the “big ones” or the “unnecessary ones” (in our eyes) and start there.  This is a perfectly valid approach, but must follow on from a careful analysis resulting from “knowing your customer”.  Otherwise, you risk creating the very event that you wish to avoid.


I have spent more than half my life delivering change in different world markets from the most developed to “emerging” economies. With more than 20 years in international financial services around the world  running different operations and lending businesses, I started my own Consultancy to offer solutions for improving performance, productivity and risk management.  I work with individuals, small businesses, charities, quoted companies and academic institutions across the world. An international speaker, trainer, author and fund-raiser, I can be contacted by email . My website provides a full picture of my portfolio of services.  For strategic questions that you should be asking yourself, follow me at @wkm610.

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posted by William Martin @ 11:08

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