Don't cut costs, innovate: A different way of looking at cost saving strategies

by: Chutisa and Steven Bowman

Read other articles from the May issue of Business Review Australia

Western economies have entered a new era. We live in a time of accelerating change in the global landscape. Today, high energy prices and sluggish economies have put a damper on small businesses globally. In this difficult economic environment, there is great urgency to improve efficiency and revenue to stay viable. Small business leaders face a vexing dilemma.

The biggest problem for small businesses is undercapitalization. Most small businesses do not have enough capital to sustain and accelerate their growth and profitability or a written cash flow strategy, and are worried about bills. Often, they devote their efforts to that instead of to revenue generation.

Businesses are increasingly turning to internal cost savings, including staff reductions. Sadly, the current commonly accepted business practices tend to compel people to believe that they need to cut costs to improve revenue and profit, making expenses the focus of the business strategy, not revenue generation. This often leads management to make decisions that actually harm the organization.

Cost saving – a virtue?

Unfortunately, ‘cost saving’ as defined by reducing your spending, is widely considered a virtue. Whenever revenue is flat or declines for one or more accounting periods, a standard practice begins.

Management starts looking at the money going out and figuring out where they can scale back. On the surface, this may seem like a reasonable reaction. It is, after all, what businesses are accustomed to doing when, for whatever reason, revenue suddenly decreases. Everyone knows you cannot spend more than you bring in—at least not for long—without severe consequences. However, cutting indiscriminately or too deeply may severely hamper the ability to grow revenues. Profitable revenue to a business is like oxygen; without it, the business is dead very quickly. 

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This conventional ‘cost saving’ business tactic reminded me of the British saying: "penny-wise and pound-foolish." The maxim refers to people who make foolish financial decisions – making decisions with small amounts of money (pennies) that end up making bad sense for affecting larger amounts of money (pounds, as in English Pounds). So what can this maxim teach us about business tactics? More than you might initially think – especially if the management team does not understand the difference between cutting costs and raising revenue.

In our view, arbitrary cost reduction – based on conventional business practices and rationale – is no longer sufficient, and risks cutting muscle as well as fat. If you are a business owner who is facing tough times, the temptation is to reduce expenses by cutting indiscriminately. Often people make serious blunders when trying to reduce costs. They grow frustrated with weak sales numbers, so they have a knee jerk reaction and jump into a cost-cutting frenzy, slashing spending on everything from letting staff go to drastically reducing the marketing budget.

This is short-sighted; they are closing down their principal source of cash flow. In other words, they are playing defense.  Small businesses that choose to play defense and conduct business as usual often fail to look beyond the scope of their immediate financial results. This traditional approach is not sustainable. When business focuses on cutting costs, they are actually not looking at what can be expanded and what can be created differently.

Key to relevancy

To avoid these mistakes, businesses should consider a fundamentally different approach. In our view, vigilant generation of your revenue is a better road than cutting expenses, and can result in substantial increases in profits. To thrive and flourish in the current environment, business leaders must expand their awareness and formulate generative strategies for their businesses. The ability to develop and implement innovation is what sets high-profit businesses apart from ones that are barely scraping by. Innovation is a principal determinant of economic growth. In recent years the capacity to innovate has become one of the most significant influences on economic performance.

Essentially, innovation is the key to your success no matter what your business is. The minute you stop innovating is the minute you become irrelevant. A successful business innovation is not an end in itself, it is not the goal – it is everything that gets you there. Innovation is not something you do once and then sit back and forget about it. Growing the business is all about how we find distinctive market positions and sustainable advantages in a multitude of ways, and how we generate revenue where revenue has not existed before. Transforming the business is about operating beyond the goal of competing to actively seize new and different possibilities.

You need different skills to take you into a future that is becoming far more complex, challenging and different by the minute. Being innovative demands a new way of being – agility and flexibility. How can you keep operating the way you do, with the same business procedures, structures, conventions and methodologies, when the rate of change that envelopes your organization is so dramatic and so dynamic and speedy?

You must cultivate the skill and insight to prepare for a future that is rushing at you and your organization faster than ever before. You have to be willing to change the points of view and beliefs that keep you moored in conventional business practices or nothing will change in your business. Instead of operating based on what has worked in the past, start generating in the realm of possibility. Give up the question, how can I fix this? Ask instead, what can I do differently that would generate different possibilities?

To thrive consistently over the long haul requires discipline and a reliable strategy for dealing with new opportunities and unforeseen adversities. If you’re going to out-create and out-perform other businesses, you must choose to operate your business differently.

The point is this: if you would like to achieve financial success with your business in today’s environment, you need to become an insatiable innovator. You have to let go of the business-as-usual paradigm. When you move beyond that, a whole new universe opens up to you.

Be an innovator

Be open and intensely curious about everything you encounter. Insatiable curiosity is the key to innovation. If you have the awareness to know what is happening and where you are going, you will be able to generate something different. 

Cultivate the courage to stand alone, even in the face of unfavorable consequences and be willing to be a nonconformist. You must be willing to let go of all the timeworn conventional business models that keep your business from being remarkable. Instead of operating based on what has worked in the past, start generating in the realm of possibility. Give up the question, How can I fix this? and ask instead, What can I do differently that would generate different possibilities?

Expand your awareness and be persistent and relentless in your search for insight, inspirations and ideas. Continuously asking yourself these questions. What else is possible? What can I do to run this business better? What can I do to grow this business? What can I do to transform this business? What processes are we using to deal with change? What could happen? What will people need and want in ten years?”

Challenge yourself to do something different. Change your focus. Let go of the fixed points of view, assumptions and conclusions that are based on your past experience. Stretch your perception beyond reality to possibility. It’s time to abandon the thinking that has had you anchored firmly to the past – and to shift your focus to the future, with enthusiasm, motivation and imagination.

Cultivate a full-spectrum perspective. Stop functioning from a linear perspective. Start looking at things from different standpoints and be willing to embrace and deal with complex and diverse ideas.

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Steven Bowman is a leading international advisor in strategy, governance and leadership. He currently consults with over one thousand nonprofit and corporate organisations each year in the USA, UK , Australia , NZ and Asia. He is a fellow of the Australian Institute of Company Directors and a Fellow of the Corporate Law and Accountability Research Group , Monash University.

Chutisa Bowman is a pragmatic futurist, author, columnist, media commentator, and consultant, with a focus on connecting business transformation with future trends and innovation. She is trained both as a psychotherapist and conventional behavioral scientist and ergonomist. Chutisa’s previous executive roles include senior executive at a number of Australia’s largest publicly listed retail corporations (David Jones, Coles Myers - Target and K Mart), and a senior consultant with one of Australia’s most prominent usability and human factors specialist consulting firms.