September 13, 2023
In the fast-paced world of business, finding ways to enhance efficiency and profitability is never-ending. The balance between reducing costs and maintaining quality is a delicate one, often leading to debates on whether cutting corners can truly be a shortcut to success.
While the attraction of immediate savings might seem appealing, a deeper examination of the implications reveals that a more delicate approach is generally the better way forward in the medium to long term.
Cutting Costs: In essence, cutting costs involves making strategic decisions to optimise resource allocation and streamline operations. It aims to eliminate wasteful expenditures, enhance productivity, and increase profit margins. This approach requires a thorough analysis of processes with a view to identifying areas that can be made more efficient without compromising on the quality of the end product or service. Reducing overheads, negotiating better deals with suppliers, and getting rid of positions which don’t add value to the company and its output are examples of cost-cutting strategies that can yield positive outcomes.
Cutting Corners: On the other hand, cutting corners involves taking shortcuts that bypass essential steps or quality measures to achieve immediate cost reductions. While this may seem a quick fix to an imminent financial woe, it often comes at the expense of long-term success. Skipping quality control processes, using subpar materials, or understaffing crucial departments can lead to compromised products or services, tarnishing a company’s reputation and potentially resulting in legal or financial consequences.
The allure of cutting corners is obvious; it allows companies to continue operating on a smaller budget and occasionally, with a high enough team morale to begin with, short periods of understaffing or cost-cutting can have the desired effect. However, this can very quickly get out of hand and your employees’ productivity will fall, as will the quality of the end product or service. Therefore, on the whole, the drawbacks of this approach far outweigh the benefits.
Quality Compromise: One of the most significant risks associated with cutting corners is a decline in the quality of products or services over a sustained period. Consumers today are more discerning than ever and have high expectations of the products or services on which they choose to spend their hard-earned money, so a compromise in quality can lead to dissatisfied customers, negative reviews, and damage to the brand’s reputation.
Short-Term Gain, Long-Term Pain: While cutting corners might result in initial cost savings, the long-term consequences can be detrimental. Product recalls, legal disputes, and customer churn can all erode any short-term gains extremely quickly, leading to a net loss for the company in the medium to long term, which eats away at any money saved in the meantime. Rebuilding trust and rectifying the damage done by this can also be significantly more expensive than the original cost-saving measures.
Innovation Stagnation: Cutting corners can stifle innovation and hinder a company’s ability to adapt to evolving market trends. When resources are consistently directed toward firefighting the fallout from compromised practices, there’s little room left for investing in research, development, and innovation.
The Pinto Fiasco: In the 1970s, Ford (GM) released the Pinto as a compact consumer vehicle. Due to a few changes in regulation at the time, they had to make a few adjustments to the rear bumper and, subsequently, the positioning of the fuel tank.
This lead to a risk of the fuel tank bursting into flames if the fuel tank was damaged or dented in any way, but Ford decided to go ahead with production anyway because the cost-benefit analysis they did showed that the potential lawsuit payouts would be cheaper than halting production and remedying the issue before units were sold.
After production had begun, the company started receiving reports of exactly this and were eventually forced to recall 1.5 million vehicles and faced legal penalties in the millions of dollars. While this didn’t sink the company, it remains one of the most famous examples of cost-cutting efforts backfiring on the offending company.
The Mongstad Debacle: In 2014, an Indian system admin working at HCL (an Indian-based IT company which handled lots of outsourced work from Europe and the West) logged on to one of the servers of Norwegian petroleum company Statoil. By accident, he had logged on to a production server that was giving him some warning messages. Not completely understanding the messages, he decided to reboot the server.
Despite additional warnings that a reboot was inadvisable, he went along with it. On the other side of the globe, at the Mongstad facility, the largest oil refinery in Norway, a tanker was being loaded with 50 million litres of gasoline, which is enough to fill up the fuel tanks of around a million cars.
Suddenly, the operation came to a halt and gasoline started pouring violently into the ocean. The night shift crew monitoring the facility looked on in horror as millions of dollars worth of liquid was disappearing by the minute.
The situation could quickly turn into an environmental disaster that would wreak havoc on the local sea life. Fortunately, the crew at the facility reacted quickly and was able to avert a major disaster by overriding the operation manually. However, a few years earlier, Statoil had outsourced all maintenance of server infrastructure to India.
The incident at Mongstad, as dramatic as it was, wasn’t a one-off occurrence. Several times previously, Statoil’s various facilities had to be evacuated because of compromised IT security and server shutdowns. The company executives now feared they could face incidents that would lead to loss of life.
It turned out that about 100 consultants in India had admin access to all of Statoil’s production servers. Every single one of them, and none of the consultants had been background-checked.
Statoil (now Equinor) is the company that forms the backbone of the Norwegian economy, one of the strongest economies in the world. The amount of damage these guys could do to the Norwegian economy and society as a whole if they wanted to was cataclysmic.
In 2017, Statoil was in the midst of a global oil crisis, with plummeting oil prices. Yet, despite the red numbers in the balance sheets and strong focus on cost-savings, the company decided to homesource IT infrastructure to Norway again, even if this came at a massive cost.
It wasn’t so much that the Indian consultants lacked the technical knowledge to manage the servers. The main problem was that they didn’t have the domain knowledge to understand what the servers were actually doing. They often didn’t appreciate the gravity of the situation. Communicating this across the globe through timezones and language barriers proved difficult.
The entire outsourcing experiment ended up being a massive failure, even though it was supposed to have saved the company billions of dollars on paper.
Rather than resorting to risky shortcuts, a smarter approach to achieving cost savings while maintaining quality involves:
A Customer-Centric Approach: Understand the needs and preferences of your customers. This knowledge can guide cost-cutting decisions that align with maintaining a high level of customer satisfaction so as to not damage the company’s output and reputation in the long run.
Employee Training: Invest in training and development for employees to enhance their skills and productivity. Well-trained staff can contribute to higher efficiency and better output quality, even if some cost-cutting measures are required at some stage.
Process Optimisation: Analyse existing processes to identify inefficiencies and redundancies. Streamline workflows and eliminate wasteful practices that drive up costs.
Technology Integration: Embrace technological solutions that can automate tasks, improve accuracy, and enhance productivity. While there might be an initial investment, the long-term benefits can far outweigh the costs.
Supplier Relationships: Negotiate effectively with suppliers to secure better deals without compromising on quality. Building strong partnerships can lead to mutual growth and increased competitiveness.
In the end, it’s about being smart with the decisions you take as a business, and not being tunnel-visioned on the promise of cutting costs.
