There is a difference between cost control vs cost reduction. Most people think that controlling costs and reducing costs are one and the same when, in fact, they can generate two totally different outcomes.
The first thing you need to know is that you can’t grow a company by cost reduction alone. You can get short term gains but, eventually, they fade. When public companies reduce costs through a restructuring there is typically a short term lift to their stock price. However, for the increased stock value to be sustainable they must grow revenue.
An example might be Barnes and Noble bookstores. No amount of cost cutting is going to change the situation that they find themselves in today. They must reinvent themselves and pivot.
So if we want to add value we must grow revenue, how do we do it? There are three ways that come to mind. We could develop new products or services, increase market share or increase selling efforts. What do all three of these strategies have in common?
You have to increase costs to increase revenue!
So instead of looking for the lowest cost in a transaction you should look, instead, for the largest value received per dollar spent. It is easy to apply this train of thought to selling costs, marketing costs or product development costs, but what about overhead?
Does hiring the candidate at the lowest salary translate into a good value proposition? Does paying a premium get you a better employee?
The answer is: “it depends”. You should evaluate each cost incurred in light of the excess value received and the goals of your company.
We knew a company who wanted to spend as little as possible on their accounting staff. So they hired the cheapest accountants they could find not the most competent. In the end, they spent more money on cleaning up the financial statements, bringing them current and completing the year-end audit than the savings recognized.
The moral of this story is that you can’t build a house with only a hammer. Consequently, you can’t grow a company profitably by just focusing on cost reduction.
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