When the coronavirus pandemic led to lockdowns and restrictions that drastically slowed business and disrupted supply chains, many companies were forced to make financial cuts.
But every slash of the budget is not created equal, experts say, and companies that are making strategic decisions with their clients and customers in mind will likely fare better than others.
In some cases, this might be the time to invest in new opportunities.
Here is advice from experts on how companies can emerge from the pandemic intact — and maybe stronger than ever.
Make strategic cuts
Facing a crisis, it can be tempting for business leaders to take a “peanut butter approach” to cost-cutting, said Alexander Bant, vice-president of research in the finance department of Gartner, a global business advisory firm.
“Too often organisations take a blanket approach when they take costs down,” Bant said. “So they’ll say, ‘We’re going to take every budget down by 2%, or we’re going to take every region down by 5%.’”
Aubrey Joachim, FCMA, CGMA, a global trainer in finance, cautions against that kind of thinking. “To arbitrarily cut resources without looking at all the consequences is not the right thing to do,” he said.
Instead, Joachim said, companies need to make strategic cost-cutting decisions based on their customers’ changing needs. Airlines naturally laid off thousands of workers, he said, because it will likely take several years for the industry to rebound. But many other industries will come back sooner and don’t require a massive reduction in labour.
One reasonable area to cut is real estate, since many employees are working from home and companies have realised they can be just as successful remotely, Joachim said.
Companies have so many opportunities now to try new things that will help them be more successful in the long run, Joachim said. “There are risks in continuing to do what you did.”
Cubewise, a global company that implements planning and budgeting software for clients, has taken on new projects during the pandemic, said Dave Heleu, director of the company’s Belgium office.
The company did not lay off workers despite a slowdown in business, Heleu said. It utilised workers who were “on the bench” and invested in building new solutions, leveraging existing experience around supply chain reporting and planning. Now, Cubewise has formed a new business unit and is giving presentations to potential clients.
“For the next three to six months, we are hopeful and positive about finding new customers in the supply chain area, thanks to that new investment, which we wouldn’t have had otherwise,” Heleu said.
Bant points to Chipotle as another example of innovation. The restaurant opened its first digital-only restaurant this month in which all customers must pre-order online instead of interacting with service line workers.
“They are funding the right people internally at Chipotle to think about innovation at a time when other companies in the restaurant space are just trying to get their costs under control,” Bant said.
Companies such as those working in design or pharmaceutical research should use the slowdown as a chance to upskill workers, Joachim said.
“You would see an opportunity of keeping them even if nothing is happening immediately,” he said. “You would use that opportunity to enhance the knowledge and competencies of those people. So when things turn around, they can be put to good use.”
Keep customers informed
Haycarb PLC, a publicly traded company based in Sri Lanka that accounts for about 16% of the global supply of coconut shell activated carbon, has not seen a decrease in demand, said Rajitha Kariyawasan, FCMA, CGMA, managing director of the company.
That’s partly because demand for activated carbon is generally recession proof. It is being used widely in the mining of gold, which has risen in price during the pandemic as investors rally behind the precious metal as a safer haven.
But disruptions in the supply chain have led to significant problems and rising operational costs for Haycarb, Kariyawasan said.
So the company raised its prices — but not before letting customers know about the increases in advance. Company leaders talked to customers quarterly to keep them in the loop.
“It was sometimes difficult, because customers said, ‘OK, everybody is suffering through COVID, so why are you increasing prices?’” Kariyawasan said.
The company explained the change was necessary to keep the supply chain intact moving forward. “Most of the customers were appreciative of the supply reliability during the pandemic,” he said.
Haycarb did not lay off or furlough workers, according to Kariyawasan, and only the chairman and managing director took a pay cut.
When companies need to cut costs, a common reaction is to add more layers of bureaucracy, Bant said. They might introduce new pre-approval requirements for spending on travel or technology.
But such measures can slow things down unnecessarily, Bant said. “All these controls clamp down the ability of the organisation to move quickly. The organisations that are going to recover more quickly didn’t clamp down too far or too fast.”
Bant said companies should allow managers enough flexibility to do what they know is best.
Haycarb has switched to an electronic approval process, Kariyawasan said. Part of that decision was based on necessity — fewer people are in administrative offices — but it also allowed the company to move faster.
The company gave factory managers more power to spend quickly, he said, and urgent approvals can be handled via phone calls with the company’s chairman or board.
Bant said companies that introduce complicated and time-consuming processes are “placing an anchor on our ability to move as quickly as our competitors”.
Worry less and learn valuable lessons
When the pandemic began, Heleu said, Cubewise’s customers were caught off guard and many initiatives were shut down. That made him worry the most.
Looking back, he said, he wishes he could tell himself to worry less. He sees companies taking a different approach as COVID-19 cases spike again across much of the world.
“I notice businesses are reacting to it a lot more maturely. We’ve seen it before. We know what’s going to keep running. We know that we’re going to get through it,” he said. “So I see less of this wild cost-cutting.”
Organisations made similar budget mistakes during the global recession in 2007–2009, Joachim said. But some saw it as an opportunity “to pick up smart resources, smart people”.
“Despite the market downturn, they began hiring people,” he said. “So when the situation turned around, who was ahead of the curve?”
Learning valuable lessons during the pandemic is key, according to experts. At Haycarb, Kariyawasan said he wishes he had one or two more factories to increase surplus capacity in situations like these. Joachim said a common household item — toilet paper — is a prime example of pandemic miscalculations.
Toilet paper manufacturers ramped up production as people stockpiled ahead of lockdowns. And then there was too much toilet paper, much of it sold at discounted prices.
“Things happened that should not have happened,” Joachim said. “That’s perhaps because people weren’t really thinking through and modelling the consequences. I suppose this is where good finance professionals should have been at the forefront.”
— Sarah Nagem is a freelance writer based in the US. To comment on this article or to suggest an idea for another article, contact Neil Amato, an FM magazine senior editor, at Neil.Amato@aicpa-cima.com.