Addition is easier than subtraction

Lesson Learned #31

It’s a lot easier to add cost when times are good than it is to reduce cost when times are bad. Maybe one of the more obvious lessons we’ve learned over the years, but probably worth remembering coming out of the recent pandemic.

Adding cost, whether people or equipment or marketing, is generally perceived as positive. Taking cost away is almost always perceived as negative. Discretionary costs can be tricky as well. Most are originally intended to be perks but perks become entitlements quite quickly so even these costs are difficult to claw back.

The best companies we work for manage their costs against revenue quite diligently, in both good times and bad. They pay close attention to how overhead expenses (and other non-revenue generating costs) move in relation to revenue as these are usually the first tell-tale signs that something is out of alignment. They are also careful to only provide perks that have real value to people and meaningfully differentiate the company.

But even the best companies struggle to react in time to any prolonged downturn, often because there are usually hopes and expectations that things will soon turn around. Waiting for the rebound can stop managers from making what in hindsight look like obvious decisions.

In the recent pandemic, companies were given a unique opportunity to rethink their infrastructure and associated costs. As they rebuild their organizations, the smarter ones will think carefully about why those costs existed in the first place and whether or not the cost equals value for their people.