Organizations searching for ways to cut costs typically reach for layoffs and salary freezes as their first tools of choice, but aggressive management techniques can supplement or even replace such disruptive moves, according to research from Greenwich Associates.
Greenwich’s Market Pulse of U.S. companies aims to determine the average amount of money saved during the past 12 months by small businesses and mid-size companies that implemented staffing reductions, salary freezes, eliminations of bonuses, curbs on travel and other cost-saving measures.
According to Greenwich Associates consultant Pete Garrison, sharp economic downturns typically result in swift staffing reductions. “But our research shows that, by taking steps to more tightly manage working capital, supplier costs and inventories, it is sometimes possible for companies to achieve cost reductions on par with those generated through layoffs, salary freezes and other steps generally regarded as being more painful to the workforce,” he says.
According to the data, staffing reductions were the most prominent cost-cutting measure implemented by U.S. businesses last year, utilized by 47% of mid-size companies and approximately 40% of small businesses over the last 12 months. On average, mid-size companies that took this step generated close to US$400,000 in cost savings, while the typical small business that reduced staff over the period saved close to $175,000.
Thirty-seven percent of middle-market companies and about one-third of small businesses implemented salary freezes or changes to existing compensation packages. Mid-size companies that took this action saved approximately $245,000; small businesses saved about $56,000 on average.
However, Greenwich believes it is possible to match these cost reductions through the following aggressive business management techniques:
• Inventory management represents an important cost-savings opportunity for both mid-size companies and small businesses. Although only 15% to 20% of companies in these categories reduced inventories last year, middle-market companies that took the step saved an average of almost $520,000. Small businesses that did so cut costs by more than $100,000.
• About one in five middle-market companies and 25% to 30% of small businesses reduced discretionary spending last year. Among those that did, mid-size companies saved an average of nearly $275,000 and small businesses saved approximately $90,000.
• Only one in 10 middle-market companies and small businesses implemented proactive measures to more aggressively manage their working capital. Mid-size companies that did take this step generated an average cost savings of slightly more than $350,000; small businesses saved more than $33,000.
• Mid-size companies were able to save close to $200,000 by reducing supplier costs and almost the same amount by curbing travel expenses.
• The 12% of small businesses that actively worked to reduce supplier costs achieved average cost savings in excess of $90,000, and the one in 10 small business that curbed travel expenses saved an average of almost $30,000.
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