Don't Let Cost-Cutting Hurt Your Long-Term Growth

Don't Let Cost-Cutting Hurt Your Long-Term Growth

Given the difficult economic conditions surround the COVID-19 pandemic, many finance and procurement teams are looking to cut back on costs. In doing so, however, it’s important to be strategic about which expenses you reduce and how you go about doing so. If you cut too much too quickly, you could end up jeopardizing your company’s long-term success.

Some of the ways cost-cutting can hurt your business include:

  • Decreased vendor quality: If you trade high-cost suppliers for low-cost ones, you could also inadvertently switch from high-quality to low-quality ones. While comparing prices can be a smart practice, you need to also evaluate what goes into those price differences.

    Some vendors might simply have higher profit margins, in which case you might be able to safely switch to a lower-cost supplier. Yet other suppliers might offer lower costs because they use lower-quality materials or lack the same service quality.

    So if you switch to a low-cost vendor for, say, home office equipment for your employees, you might save a few dollars now only to run into expensive issues down the road, like cyber-security breaches or the need to replace hardware. Even if you stick with the same supplier but ask for a price cut, think about what that means on your vendor’s end. Can they reasonably absorb that change? Or would they need to cut corners on their end, thereby leading to lower quality? Instead, consider options such as asking for more flexible payment terms. Perhaps some suppliers would be willing to accept a temporary switch from, say, 30 to 60-day payment windows, thereby giving you more time to sort out cash flow.
  • Loss of supplier relationships:While some suppliers might be willing to accept a price cut, they may only do so until they can find a new client and will end their relationship with you as soon as they can reasonably do so.

    So while a business might save a little money in the short term, they could end up in a difficult position down the road of having to find new vendors, who might lack the same quality. Even if you offer to meet the supplier’s increased pricing down the road, it could be too late; they may only have the capacity for a certain number of customers, and they may choose to work with other customers who they trust will not squeeze them on pricing. Having to then start fresh with new vendors would cost your business time to get back up to speed, which can slow down your long-term growth.
  • Decreased employee and customer experience:Cutting costs can also hurt your employee and customer experience if they end up not receiving the products, services and benefits they’re used to. For example, if you take away employees’ retirement plan matches, that could save substantial money in the short term, but that could also prompt employees to lose morale and produce lower quality work. Some could even look for another job, thereby increasing your recruitment expenses and costing you time to get new employees up to speed.

    Similarly, if you cut costs in customer-focused areas, like reducing spend on cleaning services at a time when you arguably should be ramping up this activity, customers might choose to patronize a competitor instead. And if you cut costs by reducing headcount, particularly in areas like customer service and sales, customers might end up getting frustrated at being unable to receive the same service quality they’ve become accustomed to.

Instead of running into these issues that can ultimately hurt your business in the long run, focus first on expenses that do not move the needle for customers, employees and your business as a whole. For example, you might be paying for subscriptions you don’t use or plans that exceed your needs. With the switch to working from home, for instance, you might be able to reduce your telecom costs, such as by cutting international roaming from corporate cell phone plans.

In other cases, you might find that two vendors offer identical products at different prices. This type of comparative procurement can help you save money without affecting quality.

Using an e-procurement or spend management platform can help you analyze your costs and identify opportunities to save money without hurting your long-term growth prospects. In fact, you might even be able to improve quality and customer/employee experience, such as by switching to more diverse suppliers. Want to learn more about how e-procurement/spend management technology can help your company manage costs? Request a free consultation with our product experts today.