How to Cut Business Costs During Downturn

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To ensure a competitive advantage, the low cost of production is the most important lever for us. Our business model is simple, low-cost high-volume operations.

Business upturn and downturn is a very cyclical phenomenon, but it is also a very slow phenomenon. In recent times, the kind of downturns that have taken place have largely been unpredictable – the 2000 downturn post the dot com bubble burst, 2008 economic crisis post plummeting of global banks etc.

Often what is observed that the shifting of winds from upturn to the downturn is either so slow that there’s some lag time involved while the businesses realize that they have entered a business downturn or so sudden that there’s no time for the businesses to prepare for the market crisis. By the time they do realize that something is amiss, there’s a need for a quick fix. The situation is followed by office memos announcing slash in departmental budgets, austerity measures, cut-back on investment, etc because companies want an immediate reflection in the balance sheet. But is this the most effective approach?

Substantial research has been done on strategies that can help companies ride the recession wave post the 2008 slowdown. In their 2010 HBR article “Roaring Out of Recession,” Gulati, Nohria, & Wohlgezogen highlighted how 9% of the 4700 companies they studied flourished after successfully recovering from the economic slowdown, so much so that they outperformed their competitors by 10% in terms of sales and profits.

In another 2014 article in Business Standard titled “Blend Offence and Defence”, Ranjay Gulati gives an interesting perspective on how companies should selectively increase spending in certain domains and reduce in others on the basis of customer’s needs.

As per Gulati, “Companies that focus on cutting costs and cut costs faster than the competition don’t necessarily flourish when the recession ends. However, the reverse is not true as well. What works is being able to a selective blend of both. The key is to play defense and offence at the same time.”

In my practical experience, cutting business costs is tricky because it must be done strategically and not as a blanket slashing across all domains. However, the approach to this is directly linked to the kind of business you are in. For companies driven by demand, such decisions have to be customer-centric (external focus) to be relevant to the customers they are serving and catering to their needs. For companies driven by supply, cost consciousness has to be more internally focused. Though decisions in both may be similar – for example, shutting down of non-productive production units, cutting down of labor, etc., but the method of decision making will be very different – a supply based company may use a blanket cost reduction strategy while a demand-driven company may use cost reduction in non-profitable products.

Coming closer to home, at Vedanta, we take a more internally focused approach. Since we are in the commodity business, we have limited control over the LME prices and hence the market prices of our products. To ensure a competitive advantage, the low cost of production is the most important lever for us. Our business model is simple, low-cost high-volume operations. With operations across some of the fastest-growing and most exciting markets around the world, Vedanta has a distinct advantage through its Low-cost, Tier-1 mining assets across the geographies where it operates.

Broadly, we can break our cost into 5 buckets – Raw Material, Processing, Manpower, Logistics, and other miscellaneous costs. As an organization, we have taken internal targets to cut down on each of these buckets through a very systematic approach. As a result, we are renegotiating contracts with our business partners, benchmarking our processes and implementing new technology, looking at giving higher responsibilities to younger talent to reduce our manpower bill and follow an outsourced approach to everything we do. If you see, we are not necessarily cutting the budget, but rather actively trying to bring down the bill through selective investment in technology and expertise. Even in terms of reducing manpower costs, we look at reducing the overheads on the employees rather than reducing our manpower headcount.

The mantra is very clear for us – identify the right project manager & business partner and let them deliver. The role of our leaders is more that of ‘Integrators’ who bring together all the ingredients to create the perfect recipe. This gives us visibility to a large talent pool and enables us to provide young leaders greater opportunities, thus effectively driving reduction initiatives.

Overall, there isn’t a “one prescription fits all” strategy for businesses to cut costs. It is a continuous process that businesses must follow to ensure maximum returns to its stakeholders. However, the significance increases many folds during a business downturn transforming it from a market edge to a need of the hour.

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