Tariffs Focus Attention on Costs as a Buffer to Uncertainty.
In case you missed the news, $2.4 trillion in stock market value was lost yesterday by US companies on the S&P 500.
The biggest one-day loss since the coronavirus pandemic hit.
Uncertainty is everywhere.
None of us can predict the future.
I, for one, am a student of the “law of unanticipated consequences”.
There are companies everywhere that see opportunity for their businesses. There are companies everywhere that see downside risk to products, revenue, production and supply chains.
Most surprisingly (until I really thought it through), I learned of US companies who are shifting production to European centers to serve the Canadian market.
Uncertainty focuses the mind.
Businesses worldwide are reviewing their strategies for their customers, products, revenue, cash and costs.
“Cost cutting” got a bad rap in the decades following “Neutron Jack” Welch, whose ruthless focus on quarterly earnings ultimately did a lot of damage.
But focusing on the elimination of waste and error is a strong foundation in any strategy to buffer against uncertainty.
This week’s events coincided with an article in Management Today by Éilis Cronin entitled “How to avoid getting stuck in a cost-cutting cycle”.
The article argues that “while many companies focus on short-term cost savings, high-performers are shifting towards more strategic solutions to drive lasting transformation”.
Hmmm . . . I do struggle sometimes with the “consulting-ese” around “strategic solutions” and “lasting transformation”.
Neither of those things are business outcomes.
Our businesses need to focus on accelerating revenue and cash, optimizing spend and working capital, speeding up production and time-to-value for the customer or consumer.
Whilst eliminating waste . . .
In times of economic downturn and volatility, cash and working capital are critical.
The article describes businesses getting “trapped” in a sales, general and administrative (SG&A) cost cutting cycle. To support this, a survey from Bain is quoted reporting that 69% of leaders plan to launch an SG&A improvement programme in the next six months, with 25% starting immediately. 58% listed “lower costs” as one of their top three objectives.
For many businesses, the SG&A costs are greater than their net income or profit.
Cost of Goods Sold (COGS) can be 8 times their net income or profit.
Think about that . . . .
It is an opportunity.
This is not just about headcount, but other expenditures and cash required to operate.
A 5% reduction in SG&A costs can drive a 7.5% improvement in net income.
A similar reduction in COGS (for the same revenue) can drive a 40% increase in net income.
Cost DOES matter.
Rather than “fundamentally transforming how work gets done”, we should focus on what work (tasks) actually need to get done.
“Bad processes don’t disappear, they get automated and embedded into the fabric of the organization”.
Whilst I may disagree with the thrust of the MT article, the Bain survey identifies five major roadblocks to success – talent shortages, business complexity, fragmented data, lack of process standardisation, and outdated systems.
Whilst these are true, they miss something even more fundamental.
Breaking out beyond functional silos, habits and traditions can have an assymetric impact, driving enhanced cash contribution, improving the balance sheet and the working capital that is the absolute life blood of business.
“End-to-End” thinking is what we need.
Business cycles and business processes.
Not tinkering with tasks.
Our efforts should focus on . . . .
- Understanding (what is going on and why)
- Elimination (get rid of tasks that add no value)
- Simplification (get rid of unnecessary complexity)
- Acceleration (“shift left” and move decisions upstream to the point of maximum impact)
- Digitization (“automation applied to an efficient operation will magnify that efficiency”)
IN THAT SEQUENCE!
The time is now for an intelligent focus on costs, cash and working capital as a buffer to uncertainty.
Whilst at the same time, working to accelerate revenue and cash and to speed up production and time-to-value for the customer.
Thanks for reading . . .
Tariffs Focus Attention on Costs as a Buffer to Uncertainty.
