When your business income and expenses are out of balance, don't cut costs

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"Not everything that can be counted counts, and not everything that counts can be counted."

-- Albert Einstein; given to me by my good friend, colleague, mentor, and rabbi (well, kind of), Shelly Harris.

WE NEED TO get our costs in line with our revenue -- welcome to Charybdis, the Business Spiral of Death. A recent column stated that " ... cost-cutting is always a bad goal" (see " Don't cut off your own head: Corporate cost-cutting as a goal is always a mistake"). The comment garnered quite a bit of attention, some of it unflattering. My proposition was infuriating, especially among financial professionals who report income and expenses to Wall Street (and who, as with all messengers throughout history, receive the blame). Nonetheless, cost-cutting for the sake of cost-cutting is always a bad idea -- the accounting equivalent of IT's "technology for the sake of technology."

Income and expense are tied together -- each drives the other. Try to increase revenue without increasing expense and you'll burst at the seams. Expect to cut costs without affecting revenue and you'll fall into Charybdis, never to return, because each round of cost-cutting will further reduce revenue, leading to yet more cost-cutting until nothing is left.

When a business's income and expenses are out of balance, it's a symptom. You can no more cure your business by cutting expenses than you can cure a fever by dropping the patient in an ice-water bath.

If income and expenses are out of balance, the first thing to do is to figure out why. Are your products overpriced? Look for ways to reduce costs without compromising quality or customer service. Perhaps you can reduce margins, maintaining profitability through increased volume. Perhaps you can squeeze costs out of your supply chain. Often, there's an opportunity to shift some customer service to the Web, at a lower cost than through your call center. In the call center, you might be able to use computer telephony integration to cut talk time, reducing service costs without reducing service.

Product pricing is just one possible diagnosis. In this very issue of InfoWorld you'll find another common problem: bad advertising. Cutting the marketing budget won't fix bad advertising, nor will spending more. That's the good news. If your problem is bad marketing don't cut costs. Change ad agencies and maybe your CMO.

Sometimes the marketplace is shrinking. If you're selling buggy whips and Henry Ford just put the Model T into production, it's time to get into a different business altogether. You won't do this by cutting costs. Developing a whole new product line requires investment. Cutting the costs you devote to making and marketing buggy whips is, however, a good idea.

Another common problem occurs in companies that own a marketplace. Either because they enjoy a monopoly or because they got to the marketplace first, revenue is almost automatic and margins are ludicrously high. The usual result is that the company gets sloppy. In Consultant-speak, too much money goes into "nonvalue-adding activities."

Eventually, competition happens and profitability plummets. But even here across-the-board cost-cutting easily backfires, because all too often what's cut depends on political clout rather than on market impact. Getting sloppy simply means there are lots of small problems to fix rather than a few bigg ones.

Corporate executives face constant pressure from Wall Street to appear lean and attractive. When poor profitability erodes that appearance, they're tempted to look for quick fixes.

Professional models face similar pressure to remain lean and attractive. We call their quick fix bulimia. What shall we call it in business?

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