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Strategic insights
Cut Cost By Changing and Focusing

Written by on January 12, 2012

Perhaps the most critical decision brands and publishers needs to make in 2012 is to cut cost. The reason is simple. The economics of the digital world demands a very different approach to operating your business.

In “The Non-Future of Advertising” I explained how the cost of running GigaOm is only 5% of the cost of running the New York Times - per employee. There is a big digital divide between the cost of the old and the cost of the new.

Sadly, most managers in big established companies (the ones who need to cut cost the most) seem to have no idea how to cut cost in a meaningful way. We see the news headlines every day: “Company x is laying off 1,500 employees to slim down their business.” But the way they do it is all wrong.

Imagine you have a big company with 11 different divisions, but revenue is dropping, cost is sky-rocketing, and your overall market share is in decline (sounds like Kodak doesn’t it?)

The CEO calls a meeting with all the division heads and tells them that, “In these economic times, we need to cut cost to keep up our margins. We have looked at each division, and the two smallest, the ones who are not contributing that much to the overall picture, will be closed and the employees will be fired. Adding to that, we are going to cut all the other divisions by 15% and not allow any new investments or budget increases for the rest of the year. “

Sounds familiar?

This was how most big companies chose to cut cost in 2011. And all the companies who did this are still in trouble.

The problem is simple. Nobody is going to buy your products because you cut 15% of your employees. Companies who did this never actually changed anything. They are still making the same average products for average people, and each division is limping along with the same old strategy.

The only real difference is that the employees are told to “work harder”, but with 15% fewer resources available for them. Somehow, many managers believe this is doable, but when you ask an already overworked employee to “work harder”, they get stressed. And stressed-out employees are the most demotivated unproductive employees you can have.

As Scott McKain wrote:

Chopping your training budget, slashing R&D, and cutting back on your marketing may cause you to be more profitable in the short term. However, it’s impossible to consider that approach as a long-term strategy for growth and distinction.

The option is not to spend more money, you are already spending far more than you should. You need to cut cost, but you need to be smart about it. Instead of looking at the profit margins for the past quarter, you need to look at the trend curves for the past 5-10 years.

What you will likely find is that you have three different markets. You have a traditional market which has been in decline for the past 10 years - a decline that is now accelerating. This is bad, because it is your main source of revenue.

Then you have a range of basic products that are also in decline, but not by much. And then you have the emerging market that, while nowhere near the revenue level of the traditional market, is what all the trend curves are telling you to focus on.

So what should you do?

First of all, you need to put your traditional market on automatic life-support. You still need to keep it around as it generates a lot of revenue, but you want to cut its resources to the bare minimum. Accept that it’s dying, don’t try to save it. Just let it die a natural death, and get rid of the excessive cost associated with it.

For your basic products, you need to cut cost by optimizing your workflows. Don’t just fire employees and ask the rest to “work harder” ...do real work, and figure out how to make the process more efficient.

The big change, of course, is what you need to do with your emerging markets. It’s absolutely idiotic if you decide to cut cost in those divisions that are responsible for your future. You need to give them the abilities and resources to grow. You need to add people to your new areas of business, not cut them.

Also notice that the division that is closed in the “smart cut” is different from the two before. As I wrote in the article “Failure at 10%”: If you want to be a race driver, you cannot just show up in your regular car, thinking: "I will try it first with my regular car, and then if I win I will go out and invest in a real race car!"

You need to take a risk if you want to grow. And you need to focus your risk on the markets favored by the long-term trends. BTW: Social media and digital are both long-term trends.

Don’t drop new markets just because they are small. But if a trend curve is telling you that a new market is going to flop, drop it.

The point is that, in 2012, a key element to success is going to be how good you are at optimizing your business and aggressively cut cost. There is no way around that. The new digitally connected world is based on a completely different level of economics. But the key to success is the way you do it.

And BTW: This is true for everyone. Even artists have to share the same guitar, but that doesn’t mean they cannot do amazing things - as “Walk Off the Earth” demonstrates brilliantly:

Of course, this might be taking things to the extremes :)

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Thomas Baekdal

Thomas Baekdal

Founder of Baekdal, author, writer, strategic consultant, and new media advocate.

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