Being strategic on cost cutting in a downturn can help startups to stand out

In any downturn, operational expenses are the first thing that needs attention as businesses go into survival mode, however while curbing unnecessary expenditure is important, business owners need to balance this with tactics that enable them to grow and thrive on the upside.

By being strategic and targeted on what you cut back and what you don’t, businesses can stand out from their competitors.

A Harvard Business Review study on the impact of a downturn on businesses shows that those that use a combination of defensive and offensive strategies have a higher probability of survival.

Finances and cutting expenses

Many businesses go into crisis mode by cutting costs, lowering head count and stopping investments such as in research and development (R&D), technology or developing new ventures.

The problem with this approach is that “across-the-board cuts, strict controls, and the threat of more cuts build a feeling of disempowerment” says the report. The focus then becomes survival.

By being strategic and targeted on what you cut back and what you don’t in a downturn, businesses can stand out from their competitors

While reducing lavish expenses is a must, it is not a good strategy to cut back on activities that will protect you on the downside and enable you to grow on the upside.

Resist the temptation to cut expenses that drive growth and sales. For example, during tough times Absa (now Barclays Africa) pulled their lending and reduced their focus on asset finance, they took a conservative approach and invested offshore. On the other hand Sasfin took a strategic decision to be more lenient with their lending.

The result: Sasfin doubled their lending book and positioned themselves first in the market – a position they still hold today.

Should you reduce marketing?

Your biggest mistake would be to cut marketing during a downturn.

If business is slowing down and you are going dark you will be in big trouble. Lead generation activities are critical during times like these.

This doesn’t mean that your marketing team should go overboard, but if you are targeted and focus on a great value proposition, lead generation tactics and lower cost or higher return activities like public relations, then you will come out better than your competitors who are cutting these activities.

It is a fact that increasing communication with customers can stimulate demand and boost income during a downturn. An analysis shows that both market share and Return on Capital Employed are considerably improved after a slump by increased marketing spending during a downturn.

Companies that cease spending on marketing communication for six months or more are known to damage their company image because there is a strong link between share of voice and market share, and research shows that those who cut marketing compared to competitors are at greater risk of market share loss.

Do I trim my people?

Business owners need to rally staff around a renewed vision which will inspire them and create focused energy.

Incentivise your staff to be part of a cost savings initiative and give them commission off the savings or on creative ways that bring in income. Implement cost saving initiatives that are shared across teams: shared savings mean shared reward.

Drive efficiencies instead of retrenching. Ask your staff to be creative in finding ways to be more efficient and productive. The fact is that during tough times your best people leave, they feel demoralised — they worry about being paid or losing their jobs and stop enjoying their work.

A downturn is a time to grow and you need people to step up, but you need to lead them on the journey by inspiring them towards a common goal.

Technology and spending

Never cut corners on things that relate to quality of service or growth. If you hold back on investing in technology that will enable business growth or drive service, you are doing your business a disservice.

An article from CIO states that IT initiatives that support business capabilities, are a smart investment. The article also reveals that many companies choose to see serviceable IT and connectivity as a grudge spend and not an investment in their own business.

Time is money even more so than ever before, the ability to turn around a customer opportunity within minutes is the difference between a red and black bottom-line.

The importance of ensuring your business is always up and running is critical to the service you deliver and your bottom line: every hour of down time costs local businesses between R223 000 to R700 000 per hour depending on their size.

South Africa is no stranger to challenging economic conditions and a lack of investor confidence, but this isn’t new to us as entrepreneurs. My advice is to stay smart and don’t get wrapped up in the doom and gloom, yes cut lavishness but spend on growth activities that boost competitiveness.

Warren Bonheim is the chief commercial officer at Zinia, an internet telecoms service provider