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Knowing How to Cut

July 8, 2009  

When spending must be cut, and it's just a matter of determining where, you face a process fraught with potential pitfalls. Here's some help. In a post at Harvard Business Online, Rita McGrath highlights key takeaways from a workshop on avoiding the traps that companies often encounter when trying to cut back. Among those takeaways:

Keep an eye on the real cost of the cut. According to McGrath, Home Depot built its business with a knowledgeable, skilled staff capable of guiding customers through many do-it-yourself projects. "Firing them and replacing them with part-timers and inexperienced people looked good on the bottom line for a while," she notes, "but [it] ultimately undermined the Home Depot's fundamental value proposition to its customers."

Remember that savings [and losses] don't always appear within the same department. "Costs may be saved where the budget isn't," McGrath notes. She uses the example of an IT solution that improves the accounts payable process, [although] its cost registers as a negative for the IT department.

"Unless you have a way of systematically figuring out where investments—particularly in things like IT, HR and infrastructure/operations—are really paying off, you can go terribly wrong cutting in those areas," McGrath concludes.

The Po!nt: Make spending cuts with care. "Will you notice in the short term?" asks McGrath. "Maybe not. Will your company notice in the long term? You betcha."

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