My client called with an all too familiar story - after meeting with the board, he was tasked with immediate budget cuts. Suddenly, hitting specific profit targets became the #1 priority.
Where we focus our attention - consciously or subconsciously - shapes our decisions. When the urgency to hit financial targets becomes paramount, leaders often become hyper-focused on the short term goal and lose sight of the broader context. This narrow focus limits options and can impede long-term objectives. Conversely, a broadened perspective reveals new ideas and strategic options that support both immediate and future success - an essential balance of strategic leadership.
I challenged my client to think beyond merely hitting the immediate financial target. How could he and his team expand their thinking and perspective to secure that short term financial goal while positioning the organization for longer term strategic and financial success?
This is strategy in action: aligning short-term actions and resource allocation with long-term direction.
Where Short-Term Cost-Cutting Decisions Go Awry
I often think of strategy through the lens of altitude – the 30,000 foot view vs. operations at ground level. Only a handful of strategic decisions need to be made at the highest level of altitude. As we descend from that highest level down to ground level operations, we move through layers of decisions – from the strategic north star (what’s our objective, the scope of what we do, and our competitive advantage) down to operational logistics (what copy do we use in our marketing brochures?). As strategic leaders, we’re continually iterating between the directional and the specific through a cascading set of decisions.
Many times, we’re making decisions at the wrong altitude. When managing the day-to-day operations and budgets, the short-term priorities can overshadow the high-level direction or north star. For example, imagine a company developing a breakthrough technology poised to disrupt its industry. In the face of short-term financial pressures, a leader decides to cut costs by eliminating contractor expenses - a common lever to pull in these situations. While this decision meets immediate financial targets, the simple mandate inadvertently eliminates the very talent working to create the next break-through technology innovation. Over time, the technology stalls, competitors gain ground, and what could have been a game-changing advancement becomes a missed opportunity.
Simplification tools, like cutting 10% of expenses across the board, are often used in urgent situations. But they don’t account for strategic intent, leaving well-intentioned leaders making budget cuts that don’t serve the long-term goals and may even derail them entirely.
Cutting Costs While Maintaining Your Strategic Direction
When faced with unexpected budget cuts that can lead to a hiring freeze or other cost cutting measures, it’s time to check in at the highest level before putting critical resources on the chopping block.
1. Orient to Your Future
Align to your strategic direction. What distinct value are you creating in the marketplace that is distinct and superior to your competition? This strategic clarity, defined by a cohesive set of absolute choices on how you create distinct value and where (i.e. which sandboxes does your organization play in? And which ones won’t you play in?), should drive your evaluation and prioritization of cost cutting alternatives.
Assess current and future needs. Identify the core competencies that will shape your future market position. For example, data science may be emerging as a critical source of future value creation, while traditional engineering capabilities will contribute less to your ongoing sources of competitive advantage.
The Blue Ocean Four Actions Framework (developed by Chan Kim and Renee Mauborgne) is a powerful tool for clarifying future value creation. Which then helps clarify where to raise, reduce, create, or eliminate entirely investments within the context of navigating toward your strategic direction.
2. Practice Divergent and Expansive Thinking
Re-imagine functions. While this should be an ongoing practice, it is often only in times of budget crunch that leaders challenge the status quo and rethink how things are done. Optimize what is - how could we become 2x more efficient? What can we eliminate relative to future needs?
Explore the viable options. Before narrowing your focus to cost-cutting, take time to expand your thinking to envision alternate approaches. Frame two or three distinct options that support both the financial and strategic objectives. For instance, one option could be the straightforward cost reduction across all categories. Option 2 might involve increasing investment in genomics and bioinformatics and significantly reducing or eliminating spend in medicinal chemistry. A broader perspective opens more options and possibilities. And options help clarify the trade-offs inherent in our decisions.
3. Make the Tough Calls
Understand the type of trade-offs needed. Not all trade-offs are equal. Leaders often lean on “relative trade-offs” - like doing more of option A and less of option B, relative to what we have been doing. However, sometimes we need to rise to the higher altitude view to make “absolute tradeoffs,” choosing one position over another. An absolute trade-off during cost cutting measures might involve shutting down Option A to reallocate resources to Option B in order to preserve our strategic direction and strategic integrity.
In my client’s case, he stepped back to reassess the company’s north star that had been translated into tangible and measurable strategic imperatives. He then applied budget reductions strategically (instead of uniformly), ensuring alignment with the core competencies and strategic goals.
Obstacles to Strategic Cost-Cutting
Given the pressure to deliver quick financial results, combined with the heightened resistance likely to surface to more strategic decisions - it’s no wonder many leaders take cover under the fairness argument, simply applying across-the-board cuts for all. However, this is strategic leadership in action - calling on us to lead with courage, conviction and the willingness to make these difficult choices.
There’s also the challenge of engaging in strategic thinking when budget pressures demand immediate action. Who has the time for this strategic thinking when you were expected to come up with a plan to hit those numbers, ‘yesterday.’ But these time-sensitive pressures can lead to poor decision-making. Once in a budget crunch, options for quickly improving profit margins and reducing expenses are limited and the luxury of time to implement new efficiencies is rare. Nevermind the fact that re-imagined functions often require additional resources, not fewer, to strengthen strategic capabilities.
So why pause to think strategically when many of the ideas won’t address the immediate need?
As strategic leaders, our job is to anticipate and imagine how we can optimize and streamline as an ongoing practice, while there is still time to act. The more time we have to think and strategize what to reduce and eliminate (from the Blue Ocean grid) on a regular basis, the more we can reallocate resources to create or raise/invest in strategic initiatives while still simultaneously reducing costs and strengthening our competitive advantage.
While some ideas might not deliver immediate financial results, they can still play a crucial role in positioning your organization for long-term success. Don’t let the pressure of short-term cuts stifle creative thinking about the future, and implementation of initiatives that will benefit longer-term objectives (strategic and financial). Use this moment as a catalyst for strategic reflection. At the 30,000 foot view, consider - how can we identify advanced process improvements that not only reduce operational costs but also free up resources for other investments? Encourage your teams to “break the mold” and rethink traditional approaches, especially when navigating to the north star with more limited resources.
Some Final Thoughts On Strategic Cost Cutting
Your board or investors need the team to navigate in the same general direction, but with fewer resources - at least for now. Leaders must forge a path through these unexpected challenges, while employees are looking for inspiration and hope.
When a company shifts into cost-cutting and hiring freezes, it can raise fear, uncertainty and doubt within the organization. Employees may question the business’ viability, or even worry about their job security. Many will be asked to achieve similar goals with fewer resources.
This is where that clarity of strategic direction becomes crucial. Clear strategic direction guides clarity of action, enabling you to navigate cost-cutting measures without losing movement toward your strategic direction. And your transformational vision can offer context for short-term sacrifices, building trust that these short-term actions are in service of a meaningful long term purpose.
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