High emotions during a crisis often lead to across-the-board cuts, which can damage a company's long-term growth, experts say. The better approach is selective pruning.
"During financial uncertainty, many business owners react on their gut," Stephen King, president and CEO of GrowthForce, an outsourced bookkeeping, accounting and controller services, said. "This is the worst thing you can do, as it can lead to detrimental decisions you can't pull yourself out of."
Before making cost-cutting decisions, get the data you need and study above-the-line and below-the-line costs, advises King, a business owner who has survived five recessions. Data-intensive management reports will help clearly lay out those expenses.
"Above-the-line costs make income," he said. "These are the costs your customer directly pays for."
There are only two parts to above-the-line costs: direct labor — labor that earns your company income and that you bill customers for — and direct materials, which are the equipment and supplies you must buy to finish the job. Everything else is below the line.
Below-the-line costs are not part of your core competencies, but still contribute to your business's success. They're typically organized under eight categories: rent, accounting, legal, sales, marketing, facilities, IT and HR. You want to look at these first.
"Look at each of these categories with a fine-toothed comb to see how you can get those costs as low as possible," he said. "Specifically for IT, look at software licenses that you've signed up for that are not generating customer value. Look at how many seats you have on each license and if you can condense."
He pointed to collection processes as a niche area for savings. "By transitioning to an electronic business payment network, processing invoices can save significant time and labor costs."
Another way to reduce corporate fat without cutting muscle is to review your company's product portfolio and identify which customers you can migrate to newer products so you can reduce costs maintaining old products, Gordon Stuart, CFO of Unit4, a developer and vendor of enterprise resource planning, financial planning & analysis and human capital management software, said.
"This will help reduce development, maintenance, and support costs while retaining customers and ensuring they are getting the best technology and service," he added.
He also advises looking into new enablement technologies that have the potential to improve the effectiveness of your company's sales support functions and the business's go-to market model, which can lead to improved sales output at a lower cost.
Additionally, survey your customer base, Katrina Young, owner of Katrina Young Consulting said. The increased direct communication can also save money on launching new products, PR and marketing.
Managing headcount is an important way to rightsize a business during a crisis for later success, but it's also one of the most difficult things to do, Cynthia Stephens, CFO of SaaS company Templafy said. "It's necessary to monitor the commercial hiring model very closely to ensure there isn't an over (or under) hiring of the go-to-market headcount."
Striking the right balance between employees you keep and those you let go is crucial, because not having a fully ramped headcount at the right time can slow growth trajectory. At the same time, hiring go-to-market headcount too quickly creates its own problems.
"This requires looking at metrics constantly to manage this dynamic as efficiently as possible," she said.
In hiring plans, start dates can be the difference from a short-term cost perspective, Brandon Metcalf, CEO of forecasting SaaS company Place Technology, said.
"For example, if you're a tech company looking to bolster your sales team, it makes sense to hold on hiring until mid- to late-January," he said. "The holidays are often down time for new customer acquisitions."
Regardless of the position, hiring at the end of the year may delay the expense until the following fiscal year. Timing plays an important part in expense recognition and when forecasting expenses and cash flow.
One way to cut costs during the pandemic is to reduce wasted cloud spend, Manish Srivastava, vice president and general manager of IT asset management at ServiceNow, said.
The goal is to take care of cloud computing capacity in the present and prepare for it post-pandemic, once people are again working in offices, he said.
Cutting back on cloud usage too much is unlikely to hurt a company for the rebound, unless it cuts the vendor all together, he says.
"It would be like turning off the kitchen light when you're done," he says. "you can go turn it back on when you need to use the kitchen again. And it will be cheaper if you can accurately plan what time you need to use the kitchen again, and how much wattage you'll need. But you don't need to cut power to the house all together to save money on electricity."
This kind of flexibility is a strategy that Zoom, the video conferencing company, uses to manage its capacity as demand rises and falls during the pandemic.
Don't eliminate testing
Lastly, avoid the temptation of many tech companies during a crisis to eliminate product usability testing, Jason Beres, vice president of developer tools at Infragistics, a software development company, said.
Considerable time and cost are involved in recruiting groups of paid panelists — groups that have traditionally been required to be physically present to conduct testing — but the cost is worth it; skipping testing invariably leads to massive iterations during development, which can result in thousands of lines of unnecessary code.
Ironically, this cost-cutting and time-saving measure inevitably equates to longer development cycles, missed deadlines, higher costs and slower product delivery.
"Fixing a problem during development costs 10 times as much as fixing it during design, and up to 100 times as much if you're fixing a problem once the product has already shipped," he said.