April 5, 2005

Excerpts: Real Cost of Cost Reduction

By: 800-CEO-READ @ 6:59 PM – Filed under: Management & Workplace Culture

Companies that focus on cost cutting must confront a simple truth that they prefer to ignore or deny: there is no such thing as a free cost reduction program. Any balance sheet will tell you that if you take from one side of the equation, you affect the other sidea simple rule that every bean counter knows well. However, the unasked question in a cost reduction program is: Who pays the price?
Customers pay the price. Cost cutting leads to accelerated commoditization of products and services. Customers begin to see fewer unique and differentiated products. Cost reduction also means fewer people to serve customers, so more of the service is done by the customers themselves. The people who stay on board to serve customers are not as excited and ambitious because their morale is so low. Cost reduction exacts an enormous price, and the prime target is our usual victimthe customer.
As organizations rush to brag to investors about successful cost reduction programs, they neglect to disclose the real price. They act as if cost reduction affects nothing and no one, as if it is possible to cut costs without doing any damage. In reality, cost-cutting efforts over the last few years have significantly diluted relationships with customers. As companies face the challenge of growth, they are also facing disgruntled customers who are resentful that theywere left to bear the consequences. Chances are slim that customers will offer loyalty or long-term commitment after such experiences.