Written by: Michelle Wachtel, SPHR
As businesses and individuals begin to feel the economic effects of the COVID-19 pandemic, early reactions will include reducing costs. The businesses who survive and recover quicker will consider multiple factors and consequences to their decisions. Cost reduction measures generally fall into one of three major categories: marketing, overhead and staff. Each category comes with its own considerations.
Marketing spend cuts are risky. Marketing may include large line items in monthly budgeting; however, cutting those cost can have a direct effect on incoming revenue now and after a recession. However, it may be a great time to reevaluate the ROI your marketing efforts yield and reallocate resources to the most effective sources. Take caution: cutting your marketing spend too far will handicap your business’ recovery after a recession.
Overhead cost cutting efforts are often overlooked and referred to as fixed costs. These line items are typically smaller; however, a little bit from multiple sources adds up. This is an area ripe for collaboration, creativity, brainstorming and participation from other employees. In reaction to COVID-19 your company may already be limiting travel, employee events and gatherings, like training sessions. Continuing this measure along with monitoring inventory, office supplies, capital and discretionary spending can increase the realized savings.
Consider some additional operational adjustments to maximize savings in this category. For example, now is a good time to review accounting procedures. Are payments made to take advantage of vendor and supplier terms and discounts? Speaking of terms, when was the last time you negotiated terms with those vendors and suppliers or the landlord? Now is also time to be more aggressive with collections of receipt of payments due. And you’ve talked about going paperless. What better time to save on postage and printing costs?
For further ideas, ask employees. Be careful not to single out or disable critical areas of operation or morale when considering employee input. A strong culture will be humble enough to look at their processes as well as those in other departments. Give all ideas consideration and be open to reviewing past ideas which may not have been appropriate then but might work now. It is also prime time to employ the lean and Kaizen training you or someone else in your organization has participated in to become more efficient in one or more of your critical processes. Many trainings require employees to use a real business problem as subject for their project. Did the project get put on the shelf? Dust it off and implement the changes now.
Payroll is typically the largest budget category on your balance sheet. Like overhead cost cutting, a few smaller measures can add up to larger amounts and have less of a negative impact on company culture. Cost reductions related to staffing can also have effects which impact recovery more than marketing cuts. Many of these decisions are highly regulated and may have legal repercussions, if not handled appropriately, as well. Please seek expert Human Resource support BEFORE executing any of these options.
Many companies begin with a hiring freeze. There are generally no regulatory considerations to this choice. It is simply a decision to hold off hiring replacements for vacant positions and/or not filling new budgeted positions. This can mean a direct savings of one, to one and one half, times the salary of the open position dependent on associated paid benefits. However, it can also mean a larger work burden is placed on other employees and leads to an increased risk of turnover. Since we are still at record low unemployment levels in the U.S., good people will get hired elsewhere quickly if they leave.
Delays and freezes in employee merit increases may be another staffing cost reduction but can have some of the same risks as a hiring freeze. Reduced working hours in a week or pay period can result in significant savings but includes significant regulatory risk, if not executed appropriately. Begin by reducing your overtime spend and practicing some of the lean thinking mentioned previously. If you need to reduce working hours further, consult with an HR professional on how to best accomplish this savings while remaining complaint with DOL regulations.
Directly reducing salaries and/or benefits can also yield significant savings but must also be executed with caution for turnover and regulatory risks. Furloughs, layoffs and reductions in force (RIFs) are some additional forms of salary reductions. Eliminating perks can be a simple savings measure but may impact culture and add to turnover risk, as well. Employee input can be very helpful when making decisions on what perks to eliminate or reduce.
Outsourcing some activities or hiring freelancers to perform specialized work is often an economical choice for businesses of all sizes. When reviewing operations for cost savings, it is a good idea to consider whether the function needs to be done by an employee or is best to contract out. When considering lean operations, it can be advantageous to free up operational time to work in a critical area of the business and hire out work that can take a freelancer less time to complete.
Assess the risk vs. reward thoroughly and carefully when considering any savings measures. Consult business professionals to be sure you make choices with short- and long-term effects business leaders, employees and your business can live with. Don’t cut essential business protections or avoid including subject matter experts in your decision making resulting in hasty decisions that will cost the business more. The opposite side of savings includes expensive regulatory fees, fines for noncompliance and lawsuits.
