To hear the talk of these days it would seem that to the business minded, costs are to be cut to the bone if not avoided altogether. So let’s consider what different minded leaders might do in regards to costs.
Costs as Cause
If the business is incurring costs, if it is spending more than it is taking in, then clearly tightening the belt is the obvious solution. Dire circumstances call for dire action! Guided by either/or thinking, the situation obviously calls forth a cut versus spend decision. In a world where profit is paramount, everything is reduced to the choice between profit and loss—it is the way many business minded people role.
All costs are to be avoided, at all costs! This cost-cutting policy means no further spending on labor, advertising, marketing, sales, travel, except perhaps a little on electricity just to keep the lights on.
And what about the work of the business that requires incurring costs for transportation, labor, raw materials, and other such resources? We manage by the numbers and the numbers say it is time to circle the wagons. Relating to cost as a 4-letter word, one basically cuts costs to the bone, or at least to a level that is commensurate with current revenue toward returning the business to profitability.
There is nothing in this approach that allows you to do anything that would incur more costs that could potentially make for a better future. It is a waiting game, waiting until profitability returns. Because cost is the cause for less profit, costs must be significantly reduced (or eliminated) before the business is seen as again profitable.
Just how long will one have to wait? Likely, until either there is a change in profitability or until the viability of the business is diminished. That is to say until management does irreparable damage to the system, until there is no longer a (viable) business to manage. Eliminating the business of cost is just like bloodletting. However, done to the extreme it can literally suck the life out of the system.
This view is all about eliminating costs, as if costs are causes. How or why is such a belief so prevalent? It is a combination of having a short-term mindset and having the ability to do simple arithmetic.
In regard to the first point, essentially all costs equate to spending since the benefit of investment is most often realized beyond the (short-term) horizon and thus imperceptible. To the second point, since profit is what’s left after costs are subtracted from revenue reducing costs to a minimum means more is left over. Costs are cause for not enough profit—any fool can see that! Therefore the single-minded focus on costs as a cause of not enough profit.
Accordingly cutting costs to the bare bones, particularly labor costs, is a popular action. If one views people as labor, as merely something that diminishes profit—yes as a cost—then of course one will seek to minimize labor costs. From this perspective, not doing so would be foolish.
Also it is equally foolish to put more into something that is subtracting from the profit that is so desired. After all the business of business is not to provide goods and services, these are merely means to realizing profit. Profit by any means is still profit! Moreover, often this strong desire (at times an addiction) for maximizing profit compels business leaders to seek the cheapest labor wherever it may be irrespective of the effects on the system, no matter the impact on quality and society—both issues unrelated to what’s in it for ‘me’ in the short-term.
Yes this scenario does seem a bit ridiculous. Effective leaders don’t respond this way, particularly the entrepreneurially minded business leaders.
Cost as Necessary Outcome
To the entrepreneur costs (in the form of investment) is the means toward building a viable business. And for the more mature business investing and not divesting in the business is the way to sustain the system’s viability. Therefore in a well-managed business there is an understanding of the difference between spending and investment—not all costs are the same. Therefore decisions around costs are not merely either/or decisions of cut versus spend.
Those in touch with their entrepreneurial spirit and who don’t suffer from short sightedness understand: a) that doing any activity requires expending energy which creates costs—costs are not causes but are unavoidable outcomes unless you do nothing; b) that not all costs are wasteful and unproductive and it is important to differentiate between spending and investment; and c) treating cost as a 4-letter word is reactionary and reflects a short-term focus which doesn’t allow for proactive development initiatives that would likely improve the revenue stream making costs productive.
Progress (with its requirement of investment and viability) is more important than growth in profit. Subverting progress and viewing cost as cause of diminished profit is not the way of the wise.
Effectiveness in leading is about ensuring the system is managed to last and not simply to make the next quarter’s profit number or even next year’s. The business of business cannot be profit and the future is not a series of short-terms. Being of a different mind and leading with an understanding of (a), (b) and (c) above will most likely allow one to create a more favorable future for the business, and everyone touched by the business.
Accordingly, to the effective leader cost is not a 4-letter word to recoil against. Incurring costs through investment initiatives is a way to ensure the viability of the system. It is critical therefore to differentiate between spending and investment, between value-added and non-value-added costs.
Not doing so lumps all costs as spending, inevitably causing the system great harm and a short life. Treating all costs as spending results in a lack of investment in support of the system’s viability. If one hasn’t the ability to continue to exist in the future—if you aren’t viable—no amount of profit will help.
A Final Word (For All Who Aspire to Lead)
Cost is an outcome and not a cause. Managing as if it is a cause with a focus on results along with the belief that the future is just a series of short-terms is a fool’s game. No amount of hope will help.
We create tomorrow’s reality by the decisions we make today. If those decisions are ones that reflect a recoiling against all costs—reducing our choice to cut versus spend—then we are being reactionary and short sighted. If, however, we believe having a future is a worthwhile expectation and want it to be better, then we must have the courage to enact it, to invest in it.