What Makes Businesses Exist in Perpetuity – Cost Optimization vs. Cost Cutting – Part 3.1

In the cutthroat corporate world, be ruthless in cost cutting and prove your mettle as top management. Display compassion, sensitivity and consideration and be perceived as weak and incapable. In today’s corporate world revenue is denoted as “Devtas” and costs as “Asuras”.

Interesting fact,

‘Asuras are described in Indian texts as powerful superhuman demigods with good or bad qualities. The good Asuras are called Adityas, while the malevolent ones are called Danavas’

Corporates have however, simplified “Asuras” (costs) to mean evil only, hence any cutting of these evil costs is considered to be beneficial for the business. In my opinion, for a business to grow and flourish, certain costs are unavoidable. To be sustainable certain costs though avoidable are desirable and to exist in perpetuity certain costs are imperative. In this article I will discuss unavoidable costs. Let me explain: -

Unavoidable costs to grow  

Situation: A business keen on expanding geographical footprint requires additional sales depots/ warehouse and an increase in sales force.

Cost Cutting Scenario: Additional geographies are serviced from existing infrastructure and sales team are given stretch goals.

In the short term this scenario yields exceptional benefits of increased revenue and margin. Business grows in high double digits, profits are like never before, team is jubilant with exceptional bonuses.

In the mid to long term as business grows in new geographies, demand starts multiplying sometimes exponentially and your existing infrastructure is unable to bear the burden. You default on timely delivery or delivery in full. The sales teams are constantly at war with operations and the office is now a war zone. Your infrastructure is severely compromised so goods are mishandled and there is a dramatic increase in damage and destroyed. Your once happy and content customers are pouring in with complaints but you are unable to reverse the situation because you did not build capacity well in time. Your sales team is burnt out and HR is beginning to question the increasing attrition. The consequence of this is that the business is set back by a number of years spent in building infrastructure, hiring and retaining talent and building a professional atmosphere at work. Even if you manage to achieve all this, the business might never be able to gain the brand loyalty it once enjoyed.

Cost Optimization Scenario:  Once the business decides to expand geographical footprint, it carefully prepares a financial plan with extensive details of regions served, timelines of launches, expected turnover from these regions, capacity demand ratio evaluation, timelines for capacity expansion, human resource requirement over the next 5 years, profitability margins, legal and statutory requirements etc. This enables the business to incur costs as per plan and in time for unhindered growth of business. Existing customers continue to be brand loyal thus becoming brand ambassadors for new customers. New customers are added and retained with ease. There are no exceptional bonus years for the sales team but they exist in harmony with colleagues, enjoy work life balance and are loyal to the organization. These loyal customers and experienced employees hold with them the power to make the business sustainable over a very long period of time.

In both scenarios the business ends up incurring unavoidable costs of growth. However, the method and timing determines whether your business is sustainable and will exist in perpetuity or it will be a few years wonder and then fade into oblivion.

Watch out for my next article on ‘Desirable Costs’ and ‘Imperative Costs’