Cutting costs or cutting corners?

In my CFO advisory meetings, I am regularly asked if the business should be reviewing and reducing costs.  I always answer this the same way: why? Not where, not how much—but why now?

Initiating a conversation on cost cutting normally originates from one or more of these visible symptoms:

• Cash flow pressure – things are tighter than expected.
• Market uncertainty – the economic news is spooking everyone.
• Gut feeling – “we should probably be leaner?”
• Optional additional reasons will be related to Investor or board pressure looking for “frugality and discipline.”

These are, however, symptoms. The why matters because it shapes the how. Without clarity, cost-cutting can easily slip into cost-shredding: where you weaken the very things you’ll need to bounce back.  You may have heard me saying cost cutting is about shedding fat, not vital limbs and organs.

The easy traps

The world we live in today is one of Instant Fixes.  One click shopping, Same Day Delivery, Instant access to new TV shows, music  and sport etc.  It is therefore no surprise that, as business owners, we desire that quick easy fix.  We seek a reward for doing something fast and immediate, the instant relief for acting in the face of pressure.  But this can also be dangerous if the immediate fix is the wrong long term fix.

When reviewing costs you’ll most likely be honing in on:

• People costs: Almost always the single biggest expense for most owner-managed businesses. The actions may be to pause hiring, reduce hours, cap or pause bonus payments or even terminate staff outright. And yes, on paper, the savings look huge. In reality, these decisions need to be taken with great care, and against the wider impact of lost knowledge, changing momentum, negatively impacting culture, and external perception with clients.  You should also be thinking about the costs of building up again at a later date (recruitment, training etc. but also the wider attractiveness of your business which may now be known for redundancies in the market).
• Marketing and sales: almost always the first on the list because it is viewed by many as discretionary. However, where is your sales pipeline being fed from, as this is the oxygen of your business.  If you have multiple channels providing quality leads, making marketing spend more efficient and effective can be a successful move. But if you are dependent on one and you switch it off, well, would you switch a life support machine off at the wall if it was the only thing saving you from death?
• Innovation and development: R&D, new services, tech upgrades.  Sure, these are “tomorrow’s projects,” so they’re easy to pause and shelve. Think of your symptoms again, though.  If you are struggling with new sales, and cash pressures as a result, the work on innovation and improvements are vital to keep you relevant and competitive.
• Training and leadership development: It may be that your symptoms are resulting from a lack of investment in your team development and enhancing their skills.  Therefore, cutting that budget, whilst looking harmless initially, will most likely lead to frustration, negativity and stagnation in your team.

On a 2 dimensional spreadsheet these will all look like big wins and simple fixes. And they may indeed be the right action short term and long term.  However, cutting too deeply, too widely, or simply in the wrong places to start with, and you’re effectively kicking the can down the road by selling tomorrow to pay for today.

Some lessons

Manchester United

The football season has started again so my summer of football free happiness is over. Manchester United, my team, are the best example in the world of immediacy over long term investment.  Since Sir Alex Ferguson’s retirement in 2013, results have worsened every season (and do not mention Grimsby to me please!).  In response, the club reached for short-term fixes: expensive star signings, quick managerial swaps, and a greater focus on commercial deals and sponsorships, but they were cutting investment in the things that had underpinned their long-term dominance: youth development, scouting, and a coherent playing philosophy.  United ironically now do have a cost problem caused by significantly reduced incomes from on pitch failures; but this all came from the initial strategy problem. The club hierarchy focussed on the visible, and completely missed the invisible investments, the actual valuable and essential ones that were needed and would have compounded over time.

Netflix

In 2001, when the dot-com bubble burst, Netflix was a DVD rental business under serious financial pressure. Cutting costs seemed essential. And whilst they did trim, e.g. closing offices, reducing staff, crucially, they didn’t kill their long-term vision.  At the time, co-founder Reed Hastings was already thinking about digital streaming, even though DVDs were still the core. It would have been easy to shelve that “futuristic” idea to save money. Instead, they kept investing what little they could.  A decade later, that “expensive experiment” became the foundation of one of the most successful pivots in business history. Had they cut the wrong cost in 2001, Netflix would likely never have survived the DVD era.

Kodak

Kodak were leaders of innovation and invented the first digital camera in 1975. However, when times got tough, Kodak chose to protect short-term film sales rather than invest deeper in the new technology. Cutting digital R&D seemed sensible to protect the immediate margins.  The result? They killed their own future business model. Competitors were able to progress the opportunity while Kodak slid from market dominance into bankruptcy.

This is the risk of “protecting today” at the expense of tomorrow.

Cutting wisely

The first step is to ask some questions to understand what the wider situation is:

1. Am I cutting from weakness or strength?  Cutting because you’re scared looks very different from cutting because you’re focussed.

2. What’s the long-term trade-off? If I cut here, what future opportunity am I closing down?

3. Think in layers, not lines, so Instead of approaching costs as a single line item to shrink, think of them in layers:

1. Protect the investments that safeguard your future (team, customers, innovation).
2. Challenge the costs that creep without delivering value (suppliers, tech sprawl, unnecessary perks).
3. Pause the initiatives that are good but not urgent; you can pick these up later and avoid long term damage.
4. Stop the things that simply no longer align with strategy.  

4. Which costs are truly investments? If this spend strengthens your people, pipeline, or product, it’s probably not a cost, it’s an investment, and your reporting should be clear on the distinction.

5. Where am I spending without return?  There will likely be outdated or unused subscriptions and tools, pet projects, stale or bloated suppliers.  These are prime areas for trimming without weakening the business.

6. Can I simplify instead of slash?  Sometimes the answer is to streamline processes and get more efficient, or to renegotiate contracts, not actually axe the underlying functions.

Final thought

Anyone can cut. Few can cut wisely.

A surgeon does not enter an operating theatre without a diagnosis, and does not rush to cut pain without truly understanding the cause.  The temptation is to always look for quick wins. Those who thrive are those who take a holistic view: protecting the assets that compound over time, trimming the waste, and staying brave enough to keep investing in tomorrow.

Because in business, as in football, Hollywood, or Silicon Valley, the winners are rarely the ones who save the most money today. They’re the ones who cut with clarity and invest with courage.