Many companies have already undertaken several cost cutting initiatives over the last few years. In uncertain times, some leaders carefully select their growth opportunities and position themselves to capture market share. Others optimize their sales force effectiveness to improve competitiveness.
One common mistake companies do is to reduce costs across the board by a fixed percentage, which weakens the competitive position. Let’s instead review a few best practices.
One best practice is to define a more targeted offering. In the same way many companies are focusing on evaluating its best suppliers, one should also determine its best customers. The priorities of your top customers may be very different in an uncertain economic environment than in an economy of rapid growth. Understanding what matters to your top customers will enable your sales force to tailor marketing material, key selling points and other communication based on their needs. Furthermore, every customer consumes internal resources. By focusing on the most important customers and tailoring offerings to them, companies can focus their internal resources and eliminate, reduce, consolidate or outsource non-critical activities. One example is to tailor pre- and after-sales support activities to the most important customers and offerings. This leads to the next best practice.
In uncertain times, best practice companies are focusing cost cutting and productivity improvements on those activities that drive the largest share of their SG&A expenses. One company used an activity-based costing analysis to identify its most costly activities and then focused on those to reduce costs – this is much more effective than just applying an across-the-board cost cutting figure. Initiatives that were undertaken to reduce costs included standardizing the product design activities in the sales process, eliminate non profitable customers (to both drive fewer non value added sales activities and immediately improve profitability), improve and automate the quoting tool, work with process repeatability, and cross-train across certain sales back office roles. This company estimated a total saving of 26 percent from all initiatives. Typical savings are in the range of 20-25 percent (but can be higher or lower).
However, some companies decide to use the improved productivity to take on more sales, without hiring new people, while others prefer using it to directly reduce operating expenses.
Another area is pricing. Pricing has a larger impact on profitability than almost all other means available to managers. Yet, pricing does not receive enough focus in most organizations. Managers and sales people need to be very careful with discounting, especially during uncertain times. A cut of one dollar directly hits the bottom line by the same amount. More focus and stricter pricing policies are often needed to avoid price wars and price leakage. In uncertain times, it is especially important to define what those are. Differentiation is another area affecting pricing. When you are providing a different value than your competitors, the challenge instead lies in setting an appropriate price – you may even be able to raise your price in a downturn. Improving value-based selling, setting price of offerings based on your customers’ needs, and implementing stricter policies around pricing and discounting are examples of important levers available to managers in uncertain economic environments.
Other initiatives frequently undertaken include stricter performance management, improving prioritization of customer prospects, redefining sales deployment of both frontline and back office personnel (territory coverage, roles, activities, number of people, etc.), reducing complexity and finding new means of financing customers. Some companies reduce, eliminate, consolidate or outsource non-critical activities – both to save cost and improve focus. Others take the opportunity to improve productivity of frontline sales by implementing a value based selling approach.
To conclude, best-in class companies use several of these approaches to improve their competitive position by working effectively with sales management in a slow-growing economy.
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Rickard Alfredéen is the founder of Oneforce, a management consulting firm focusing on growth strategy and performance improvement. He has consulted to more than forty companies and has extensive experience with firms such as Bain & Company and Booz & Company in Europe and the U.S. He holds an M.B.A. from the University of Chicago Booth School of Business, M.S. in Electrical Engineering from the University of Houston and M.Sc. in Engineering Physics from Uppsala Universitet.