Six differences that distinguish cost cuttings from cost reductions

Chris HOHMANN – Author

1. Arbitrary vs. Rational

Cost cutting is an arbitrary decision to suspend some expenses or drastically reduce budgets. It comes quick and unexpected. The often arbitrary, brutal and sudden non-negotiable stop of expenses deserves the name ‘cut’.

Cost reduction is a rational decision to drive some costs down, usually through a structured and timely phased program.

2. Reaction vs. analysis

Cost cutting is an answer to some emergency to save money in order to overcome a crisis or to please investors / stock exchange.

Cost reduction comes as an answer to a situation assessment, an improvement plan, a benchmarking study. The purpose is usually to improve competitiveness for the mid/long-term.

3. Blanket vs. focused

Cost cutting is pretty arbitrary as it focuses on some expenses judged as non-priority or hits equally any expenses with an overall target, e.g. saving x million € or y % of budget. Thus cost cutting is not virtuous, it just reduces the total cost (value and waste) instead of getting rid of wastage.

Cost reduction is based on rational search for lasting improvements, targeting unnecessary expenses, excessive spending or trying to find cheaper alternatives. Cost reduction programs are opportunities to revise designs of products and services, reconsider the supply base and sourcing and any other opportunities. Cost reduction is an invitation to reconsider value, to be creative.

4. One shot vs. sustainable

Cost cutting is generally not sustainable as some expenses are necessary, as for example buying spare parts and maintaining machines in operating condition. Once the savings made, cost cutting gives top management the feeling of big achievement but the savings are short-termed and are usually made at the expense (so to say) of future budget.

It is not unusual to see a surge of expenses afterwards, in order to recover from the negative side effects of arbitrary cost cutting.

Cost reduction do not only last but the new practices, alternative sourcing or solutions may be applied to other departments, businesses or products.

5. Limited vs. infinite

Cost cutting is always limited. Cost cutting will always reach a technical and/or operational limit beneath which no more business can be done safely, achieving the targets e.g. quality, reliability, timely deliveries, and so on.
Paradoxically cost reduction can lead to increased incomes when offers are made more competitive. Increasing incomes can literally be infinite while cost cutting has an absolute limit.

As we see, compared to cost cutting, cost reduction can be a good thing and is not necessarily stressful. It can even be fun.

6. Quick vs. slow

The weak point of cost reduction is the required time to yield results, making it unfit to deal quickly with a crisis. Cost cutting can be seen as a necessary evil to overcome a temporary hard time, but might not be sufficient without trying in the same time to increase revenue.

As a conclusion, Cost reduction is simply not cost cutting, but confusing them, people fear both.

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