We are now conditioned to the word ‘cost’


We are now conditioned to the world ‘cost’. It was recession which hastened us to think of ‘cost’, otherwise, I am sure, none of us ever have considered cost as prime strategy. During the recent downturn, most of the companies improved or sustained their relative bottom lines with the help of cost cutting measures. According to a recent Mc Kinsey survey, most of the companies made effective and significant cutbacks in overall costs since the onset of economic downturn in September 2008. As the downturn is supposed to be behind now, I feel most of us overreacted to it and become hyper aggressive in cost cutting measures. This resulted in the reduction of investments in productive area, impacting future growth prospects. One reason could be that in difficult times, when managing cash flow is the prime concern, or it is projected as prime concern, all outflow including future investments appear as costs. In this perspective, we must understand the difference between cost and investments.

According to one of the reports of Crisil, India Inc’s planned capex expenditure will be dropped by 25% over next three years. This is an example of cutting investment which was designed for future growth prospects. In some cases it could be postponements. In both the cases, cutting future capacity investments or postponing capacity addition is actually creating a gap which we may face in next two or three years. Companies conservative on their own plan capital expenditures, will loose opportunity if situation comes back to normal, which seems more likely now.

Situation is actually coming back to normal. According to a recent McKinsey report, the number of households in the deprived segment is likely to drop from 101 million in 2005 to 74 million in 2015. Which means around 27 million households will enter into lower middle to middle class. Can you imagine the kind of increase in overall consumption? Who will cash such demands in an environment where companies are postponing their capacity expansion plan?

There is another similar example in form of manpower layoffs cases. Most of the IT companies, who estimated their manpower as more than adequate in number, discovered an opportunity to rationalize their headcount during the period of downturn. They did it. Most of the other companies in various other industries followed the same strategy. I feel this was a wrong decision in the name of cost. Now, when the growth prospects for IT industry is returning back in shape, (estimated software export growth in coming year is over 20%), the manpower strength is becoming the bottleneck. Almost, all IT companies are now back to recruiting in full swing, to fill the gap created by them only. A sudden increase in demand of IT professional means rotation of same net people strength for short term prospects without filling the actual gap in the industry. This means more lucrative offers in form of salary structures. So, who lost in the process? This is one of the example of cutting investment in the name of cost.

A waste is a cost. It is one of the easiest think to differentiate between costs and investments. To reduce the waste two things are required; one is discipline and the other is investment. Discipline at work place can reduce wastages in the form of stationary, electricity; maintenance etc. and to some extent productivity. Investment in new technologies and new skills reduces wastage by improving efficiencies. A more efficient process takes lesser costs. Instead of focusing on cost why should not we focus on process to make it more efficient? This is a tough decision to make, especially in difficult times, as it needs investments. I am sure that few companies must have thought in such direction.If I assume that a company’s lifecycle is long enough to handle one or two economic downturn and believe the cyclical nature of such fluctuations, imagine the gain a company would have who sees downturn an opportunity to invest in new technologies, training and processes at negotiable rate, and is ready for the time when the downturn cycle turns in other direction.

Advertisements

2 comments

  1. Santosh,

    I like the thinking and especially the fact that ” a waste is a cost”. There is certainly nothing more true. However what is cost and what is deemed as investment depends more on the strategic intent of the org. Take for e.g. the IT layoffs that you mentioned. When orders are not coming in, the “bench” is certainly looked as a prime contributor to direct cost. However, the layoffs are not done in absolute terms. There is rationalization, and survival of the fittest, is the yardstick. Its easier to reflect post recession because we are seeing a finite time element and certainty, but when companies are in middle of recessionary winds, visibility and continuity, terms that are foundations for the “going concept” of an org, loose their identity. Noone knows how long such conditions will prevail, and in many cases with cashflow being out of tune, prime concern is to wither the storm. With Stakeholders getting hammered by shareholders, I guess, all such decisions get aligned to protect value. And when orders are not coming in, cost rationalization to protect projections that were aleady comitted before the recession, become a necessary evil.

    To summarize, what is termed as investment in a normal business condition is different when going is tough. It takes not only courage but some deep pockets and a lot of foresight to really make investments during recession.

    That said, I think the point about process efficiency is “on the money” and there is no reason for not doing it.

  2. Thanks Mohit for your analysis of my post.
    I agree with you that in tough times its really difficult to define real cost. The point i wanted to make is that only waste should be termed as cost, everything else is investment as its designed for certain output. If there is a problem in output, one should look for efficiency.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s