Cost-cutting often becomes inevitable during difficult economic times. Reducing costs helps the business run a tight ship and enables a competitive advantage. But many-a-times, cost-cutting exercises yield only temporary results, and some attempts even backfire. When enterprises get their cost-cutting strategy wrong, they shoot themselves in the foot. Here are the cost-cutting mistakes to avoid.

1. Making across-the-board blanket cuts

Gartner estimates only 43% of business leaders achieve their targeted savings during the first year of cost reduction. The reason is making cost-cutting decisions in panic, without a plan, and setting unrealistic targets. Many enterprises cut costs because they want to do something. They eliminate the most visible costs and, at times. Others make blanket, across-the-board cuts. Such knee-jerk action to reduce costs have unintended consequences.

Cost-cutting benefits the enterprise only when done in a calm, measured way. Avoid the following mistakes when making cost-cutting decisions. 

• Cutting processes that generate value or are critical in the broader scheme of things. Across-the-board cuts penalise the enterprise’s most efficient parts and wasteful interests equally. It erodes important sources of value.
• Not considering the big picture. Many functional heads receive cost-cutting targets from the C-suite. They set about their task with due diligence but remain oblivious to the “big picture” or the broader implications of their actions. Many cost-cutting initiatives lead to unintended consequences which manifest elsewhere.
• Not distinguishing ‘good expense’ from ‘bad expense.” Cutting the “good” expenses that sustain the advantage or generate profits subverts the business. The time-tested 80:20 rule holds that 80% of profits come from 20% of strategic goods. Identify the 20% of expenses that add the most value, and protect such processes from cost-cutting. 
• Cutting essential inventory. Reducing inventory levels across the product portfolio is a good way to improve short-term cash position. But such a move comes with the downside of putting customer service levels at risk. Make sure reduction does not include critical items that contribute to profits or put a spoke in the wheels of essential processes or sales.
• Failure to prioritise. Cutting positions and projects indiscriminately is a mistake. Review projects and systems, and cut down flab. Next, rank expenses according to the value generated or the returns for the dollar spent. In many instances, the reduced demand for products may make some services untenable. Also, some obsolete processes may linger. 

2. Failing to sustain behaviour change

Only 11% of enterprises sustain cost cuts over three years. The reason is the short-term focus of most cost-cutting strategies. Consider policy rules that cut visible costs, such as travel and administrative expenses. Most of such expenses creep back under the guise of supporting growth. 

The long-term solution is an organisational restructuring and a focus on behavioural change. For instance, develop a policy on virtual conferences and digital marketing, along with cutting down travel costs.

Likewise, cutting down on marketing may be a mistake. Instead, refocus the marketing efforts on boosting sales instead of brand building.

3. Not handling HR tactfully

Many businesses reach a point where there is no option to terminate employees. But only some companies handle the situation well. Avoid the following mistakes during terminations. 

• Eliminating employees who perform essential roles. Consider the value added by the employee and their replacement value before shedding them. For instance, letting go of sales employees who used to operate from a sales outlet in a shutdown shopping mall might be inevitable. But reducing sales staff in a busy shop to make the corporate bottom line look better may be counterintuitive. The customers, who face lengthier wait times, would move to a competitor.
• Not communicating with surviving employees. At times, employees who stay may still face salary and benefits cuts. A coherent strategy to convey the rationale is necessary to maintain morale. For instance, if the management is also taking a cut along with everyone else, communicate the same. Also, communicate with positive intent. For instance, put together a benefits statement that includes a summary of available benefits.
• Not motivating survivors. Cost-cutting often damages employee experiences. Sit down with those who have survived the axe and infuse confidence in them. Make them acknowledge the changes. Failure to do so sets in panic among the survivors. They, too, would search for jobs, leading to a downward spiral in productivity, morale, and efficiency. 
• Neglecting performance evaluations. Think long-term. Make sure people still set goals and work to achieve them.
• Not cancelling the access rights of the terminated employees. Terminated employees may syphon off trade secrets or sensitive data. The enterprise ends up coughing back-breaking fines.

4. Getting technology decisions wrong

Many businesses postpone or set aside tech investments when there is an inflation or economic downturn. But cutting corners on the tech related to the quality of service or security is a mistake. Avoid the following mistakes.

• Degrading service delivery. For instance, businesses may downgrade their connectivity channel from T1 to DSL to cut costs. DSL is less expensive but compromises speed and efficiency and degrades the quality of service. 
• Cutting corners on network security. Not subscribing to the latest security tools compromise the security of customers’ data. A breach leads to a loss of reputation and back-breaking fines and sounds the death knell of the business.
• Not exploring cost optimization techniques as an alternative. Examine cloud-based service offerings that avoid the need to invest in IT tools. Offload equipment and software maintenance to managed services.
• Not investing in technology. New investments during economic downturns may seem counterintuitive. But harsh economic conditions may also necessitate investments in tech. Technology that reduces business costs or improves customer experiences makes sense during such situations. Such investments help the company outperform competitors and retain market share.
• Delaying funding to innovation indefinitely. Aggressive cost reductions that choke innovation blunt the enterprise’s competitive edge. Identify high-impact innovation projects. Delaying funding for high-impact innovation projects allows competitors to take away market share. 

The best cost-cutting efforts deliver austerity. Such initiatives make the enterprise lean and mean and enable it to reap greater profits when the bad times go away. But done wrong, cost-cutting does permanent damage to the enterprise.