Albert Einstein once said, “The definition of insanity is doing the same thing over and over again and expecting different results.”
Why is it that so many businesses today are strictly focused on cost cutting as opposed to internal innovation? Please note that I say “strictly” – I do believe that fiscal conservatism is very important.
I understand that cost cutting is needed in today’s economy but, as you cut costs, you’re also reducing your ability to market, sell, engage, deliver and improve results. A population that does not produce any new members eventually dies. So it is with business.
There are several numbers that drive profitability – revenues, cost of goods sold and SG&A (sales, general and administrative expenses) for example. Much of the focus in today’s economy has been to reduce the expense of delivering a good or service – whether that’s in the manufacturing or delivery aspect, or in the back office support component.
Yes, these cuts reduce what gets subtracted from your revenue, resulting in an increase in EBITDA and profitability, but they do not lead to sustainable growth. At the end of any recession, cost cutting alone will cripple a company. Innovators will be accelerating their growth and leaving cost cutters to catch up. Reducing costs to the point at which you can still effectively engage with your customer, keep your employees happy and also innovate is more cost “right sizing” than cutting.
You can keep reducing your costs – every year, every month, every week and every day. You can keep doing the same thing over and over again, and at some point you might expect to come out on top. You may see short term success and an increase in EBITDA, but your revenues will inevitably dip and you’ll be wondering where and what to cut next.
I believe the answer to escaping the doldrums of cost cutting, and the employee and customer demotivation that tends to accompany it, is to focus on internal innovation, evolution and change. Focus on the top line – increasing revenue – while balancing this approach with effective fiscal conservatism measures – spending decreases that do not affect your ability to create, sell and deliver.
A key point to take away from this is that innovation doesn’t necessarily have to be global in nature. You don’t need to create something completely new to innovate. I’m talking about focusing on internal innovation.
If you currently serve a single vertical, innovate within your company by serving additional verticals. If you currently target one geography, add additional geographies. If you have two or three services you deliver today, add an additional service and target your existing customer base with it.
I understand that, even for the smallest company, these “innovations” are complex and may have an associated fiscal cost – but they focus on top line revenue expansion. They are about growth as opposed to cuts. They are about creating a new sustainable revenue source as opposed to squeezing an already squozen orange. Innovation is also a motivator and will, managed correctly, inspire employee and customer growth.
By the way – innovation and cost-cutting can live in harmony. Take a look at how Netflix is using the cloud as an innovative way to deliver videos. Perhaps starting to ask yourself “why” you do things a certain way as opposed to “what” you can cut will also lead to internal innovation.
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