Leslie Budd on... cutting costs

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There is a discourse in business schools about wicked problems, ones that are difficult to solve because of unintended consequences. Personally I find this discourse pretty vacuous. If solutions were simple then there’d be no drivers for creativity and innovation. The contemporary wicked problems appear to be cutting costs and tricky customers. Well customers are always tricky, and they can sometimes conform to the idea that hell is other people, whether they are train or bus passengers, or MBA students.

Perhaps the trickiest problem is how much and when to cut costs. There appears to be a reflex to slash costs when the economy and businesses face challenges, but there are two questions for this approach which are basic. First, how can costs be identified and allocated? Second, why does there tend to be a confusion between cashflows and budgets? But the fundamental problem about cutting costs is when the economy is facing a downturn.

Which brings us to the stocking problem. Stocks are often cut to the bone during economic downturn, but the accelerator principle in economics shows us that this may not be a rational response. The accelerator principle occurs when new investment accelerates or speeds up the rate of increase in output of the economy. As the economy nears the top of its cycle extra investment can accelerate it past the peak.

The same logic applies to being near the bottom of the cycle. If investment is not maintained then, or is maintained and renewed then the economy will start to accelerate past its trough. But if you do not invest in new stocks at this point in a cycle there may be a slowdown in the pace of the recovery, and the extra costs of renewing stocks may outweigh the original cost savings thereby undermining the logic of cutting in the first place.

The bottom line is that if businesses are too internally focused on reducing expenditure and not on market demand and revenues then they will be cutting off their noses to spite their customers’ faces whether they are tricky, wicked or just plain good.

That’s my view, join the debate with the Open University.