When a business is in the red, it may be tempting to try and increase profit by cutting costs. A fledgling business owner may surmise that departments could be downsized, responsibilities reallocated and consequently revenue will rise.
However, according to a recent article featured by Inc.com, while trimming the fat off a company is a positive management strategy, it is unwise to cut so much that it spreads a company too thin.
"You can't cut your way to growth, and while cost-cutting may create a short-term win by improving EBITDA [Earnings before Interest, Taxes, Depreciation, and Amortization] or net income, it’s not sustainable in the long term," Karl Stark and Bill Stewart, the co-founders of Avondale, a financial consulting company, wrote in the piece.
Therefore, the article suggests that a company's executive team needs to closely analyze the business' critical costs, and determine what effect cutting resources will have on the company both immediately and in the future.
One area of a company that a business owner may unwisely consider downsizing is the customer service department. For example, a decision maker may believe that the duties of several employees answering phones, fielding customer concerns and channeling business transactions could be put onto the shoulders of one employee.
However, cutting costs in customer service could ultimately decrease revenue as potential business transactions may be forgone while the diminished personnel are busy undertaking other tasks.
Considering the negative effects that poorly planned downsizing can have on a company, corporate decision makers need to approach cost-efficiency strategies with great caution.
One strategic solution to cost reduction in the customer service sector could be outsourcing all online correspondences and phone calls to a certified third-party answering service. Because many of the most reliable answering services have significant employee resources but only charge for the time spent interacting with customers, a company can cut the costs of full-time employees without adversely affecting their revenue stream.