Cost Reduction and Businesses in the face of Economic Downturn

Covid-19 has become a global emergency and has been declared a pandemic by the World Health Organization. It has disturbed the political, social, economic, religious and financial structures globally.  Businesses are coping with lost revenue and disrupted supply chains as factory shutdowns and quarantine measures spread across the globe, restricting movement and commerce.

Closer home, according to the World Bank Press Release, April 29, 2020. The Kenyan government’s immediate action has focused on strengthening the health system which faces an extraordinary challenge to contain the spread of COVID-19 and care for the infected. Further health policy measures such as working from home, travel restrictions, the closure of schools, the suspension of public gatherings, and a nightly curfew, are necessary to delay the spread while the country ramps-up investment in its healthcare systems. Nonetheless, they are also quite costly to the economy by reducing social interaction, production and demand across all sectors.

Most Businesses have found themselves in unfamiliar business environment and are asking the same set of questions: How should I forecast my revenues? How should I adjust my budget? When will this be over, and when will we return to “normal”? In the wake of so much uncertainty Businesses have to quickly strategize and get ready to restart on their new Business Model in order to continue operations now and even after the Crisis. One among these strategies is Cost Reduction.

According to Deloitte’s Right-sizing your cost base for COVID-19, businesses are facing immediate loss of significant contracts, immediate demand-erosion, fulfilment restrictions and supply chain shortages and are rapidly left with a cost base, both direct and indirect, that requires immediate right-sizing to fit the interim shape and size of their portfolio’s performance.

The unprecedented cost reduction strategy requires flexibility in its design and it has to be aligned to the new Business Model that will have to be developed as a result of the pandemic.  There is no one-size fits all strategy since businesses are wired differently.

Phases Businesses will go through as they navigate the Crisis

Globally the fight against the current crisis (COVID-19) has been divided into phases. While each nation is on its own journey, with differences based on the wide range of geographic, demographic, societal, political, and economic factors that result in variation, the basic shape of the journey is the same everywhere.

Three distinct phases emerge and with it three phases emerge on how businesses can navigate through each phase.

Flattening Phase – Flatten COVID-19’s exponential growth curve

This is the initial response and involves a lock down in order to reduce the peak caseload in an effort to “flatten the curve,” and to avoid overwhelming the health care system. Strict physical distancing, bans on gatherings, wearing masks and closure of non-essential services are highlights of this stage.

For Businesses this is the Survival Stage and involves rapid changes to enable businesses to continue operations. Cost Reduction is particularly significant in this phase.

Steps in coming up with a Cost Reduction Strategy

The first step is to assess and define the impact COVID 19 Crisis has had on the business. List down all the changes that have occurred in the business since the Pandemic begun. Including but not limited to revenue loss, Liquidity challenges, disruption in supply and distribution channels etc.

Secondly identify all key processes and costs in the business and determine what can be reduced and still maintain operations.

Then finally take action on what was identified in step two above;

a)      Stop Spending

All identified non-essential processes and costs to stop with immediate effect.

b)      Reduce Spending

Identify and use cheaper alternatives in executing key processes in the Business

c)       Re-allocate Spending

Divert spending from processes that have been assessed as insignificant to key activities that are relevant during the crisis in order to facilitate operations.

Fight Phase – Re-start the economy while maintaining a low infection rate

This is the second response and is initiated once a sizeable, sustainable decline in new cases and new infections is reached, and elected and public health officials feel that the situation is under control. In this phase some restrictions are reduced and moderate level of economic activity begins.

For Businesses this is the Business Continuity Phase and involves re-thinking the business model for the new way of working.

Future Phase – Sustain the economy through highly effective treatment

This is the third response and is initiated once the vaccine is approved, available, and widely administered, or at least a highly effective treatment is developed. In this phase, economic activity can be fully restored. For Businesses this is the Sustainability Phase and involves institutionalizing frameworks for the new model.

Cost Reduction Strategies in the Fight Phase and Future Phase, will involve focusing resources towards the new business model and the new way of working. This can be done through leveraging on technology and innovation, in order to obtain high returns and outsmart the competition.

The short-term cost reduction measures as illustrated in the ‘Survival Phase’ are essential with continuous monitoring but, from the financial crisis of 2008/2009, it was noted that companies that deployed sustainable cost reduction programs significantly outperformed the competition.

Businesses should approach cost reduction not as a one-off activity but as a continuous process. It should be aligned to the Business Model, Business Strategy and embedded in the Business Culture and way of doing things.

As a first step, Business Leaders should take time to analyze their businesses and its ‘new’ environment and come with short term cost reduction strategies to ensure business survival during this crisis. Thereafter as the pandemic eases and economic activities begin to increase, businesses should come up with long term cost reduction strategies that will direct resources towards executing the newly developed business model. It is likely that some shifts in behavior as a result of the pandemic will be permanent for example massive shift to remote work, online purchases, e-learning among other behaviors.

In the long run, implementing the short- and long-term cost reduction strategies will ensure Business Survival through this crisis and profitable operations even after the crisis.