Hard Times

For many, the era of champagne receptions has long since passed. But where else can costs be cut without harming the core...

For many, the era of champagne receptions has long since passed. But where else can costs be cut without harming the core business? asks Lindsay Nicolle

Psst! Need to save some money? Has the old cash cow started to run a bit dry and the suggestion of economies crept into the boardroom?

Have no fear. Even the mighty Amazon is looking to cut costs and consolidate as leaner times begin to bite. Witness the closure of its Georgia distribution centre costing some $150m, and the imminent consolidation of its European operations and redeployment of some 1,800 staff.

Although not every dotcom can make such giant savings, every little helps. ClubSix, a social networking and dining club, rationalised its business before it launched in January 2001. Frightened by the collapse of the dot-com boom, its founders scrapped plans for £30m venture capital funding to cover promotion and technology, and decided instead on self-funding. "We cut back on technology and marketing spend and will reinvest surplus profits in the business to support our growth ambitions," says Don Koulaouzos, chief executive of ClubSix.

Being self-funded has impacted on the business schedule, scope and scale, but ClubSix has still achieved its predicted initial customer base of more than 200.

Marketing and technology are two favoured areas for wielding the cash-saving axe when the going gets tough, but it would be unwise to slash and burn indiscriminately. Customers only buy from firms they know about, and technology is what drives the business. The danger lies in poorly targeted and unmonitored marketing spend, and cultivating an obsession with bleeding-edge technology instead of core business systems.

"When funds are tight the last thing you should do is slash your marketing budgets," warns Chris Wright, director of Evus, a marketing consultancy whose customers include Cataloga, Lost Wax and Pervasic. "You get what you pay for in this life, so if it's customers and revenue you need, don't cut your chances of getting them."

Wright cites Hewlett-Packard's February financials statement, which blames "insufficient demand generation funds and account conflicts" for impacting results of the company's PC server and Unix server businesses.

So what else can be sacrificed to save cash apart from marketing and superfluous technology?

To find out, take a tip from 'The Godfather': go to the mattresses. Take tough decisions across the board without emotion. It's not personal, it's business. Get shot of low-value customers, lay off staff that don't bring financial and cerebral value to the business, sell the company car fleet, cut loose from that fancy address, consider changing product or sector, re-group and start again.

Tony Connor, managing director of Innovations, the business accelerator division of Affinity Internet Holdings, says, "If funding has been pulled, be honest about why. Is it because the company cannot see enough turnover or is its payback period getting longer because targets are not being hit?"

Whichever, look at where the sales are coming from. If the normal 80/20 rule applies, concentrate on the 20% of existing customers that you can squeeze more business out of. They're likely to trust you and your product more than the other 80%, and they're also part of the long accepted marketing rule that it is cheaper to retain existing customers than find new ones.

"Then look at costs. How many people are employed to create information? Are staff salespeople and profit-centred? If not, why not? Try and do more with less."

Other tough questions to face are: what is the core of the business? Is it mainly information-led on an advertising basis or is the business plan based on subscription, pay per view or

e-commerce? Is the basic product wrong or the sector wrong? Can the business outsource services and save money on in-house staff, or do contra deals with other Internet or traditional businesses? How many of the fixed costs can be translated into variable ones?

But again, there is a fine line between trimming business fat and losing muscle. It would be foolish to cut into the core of the business or lay off expensive but good staff.

"As the easy money evaporates many will actually cut out their own experimenters and inventors - the source of creativity from which all value is born between the inventor and the e-customer," says Max Mckeown, author of E-Customer, a report published by Pearson in March 2001. "The golden rule is to never cut anything that the e-customer values sufficiently to pay for. Find out what he appreciates. Not just a simple set of objective improvements but stuff that speaks his language, pushes his buttons, clicks with his karma and that fits in with his priorities.

"The trick is insuring that the inventiveness is focused on the lifestyle of the e-customer so that it will return sufficient cash to allow business to continue and improve. This is where super normal profits can still be made."

Planning for a leaner business strategy means involving internal staff, independent third parties, and, that most forgotten bunch of critics but arguably the most important - customers.

Be open-minded about potential partnerships, maybe with bricks and mortar companies willing to buy 'distressed stocks' as cheaper options to developing their own teams. Companies that offer 'parental support' in exchange for equity, such as Affinity, are also an option. They can keep a business going at a lower cost while it's rebuilt for profit. It's painful, but it's a lesson in survival.

Above all, set realistic expectations. Outline a sustainable and measurable growth strategy and sti-ck to it. It's dotcom or 'dot gone' time.

Case study: Earthport
n A year before the dot-com bubble burst, Graham Newall joined Internet global payment system specialist Earthport as CEO. His remit was to help the company avoid the boom-and-bust mistakes made by the early dot-com failures. The firm was moving into e- and mobile commerce and needed to keep its feet on the ground.
n Newall cut the marketing and advertising budget, switching from targeting individuals to piggy-backing ads off big-brand sites. The cash was pumped back into new bread-and-butter business systems - enterprise resource planning and a Lawson financials application, to act as improved early warning systems on performance.
n The result has maintained Earthport's profile while placing a steadying hand on the tiller.

Clean out: Trimming your business for lean times

  • Cut:

Large consultancy teams
High advertising spend
In-house server costs
Free and low-margin goods
High leases/rents/rates
Champagne culture
Leader fixation
Machine fixation
Bad customers
Non-core technology
Promises - be realistic with employees, clients and partners
Fine tuning of Web development
New product development
Back-office projects
Directors' salaries
Travel expenses
Company cars
Mobile phone excesses
Unnecessary meetings
Salaries - provide share option schemes instead
Unrealistic business models
Non-strategic partnerships

  • Keep:

Good staff
Guerrilla marketing
Virtual service provision
Anything customers pay for
High-quality equipment
Fun learning culture
Team spirit
E-customer obsession
Structured PR/communications strategy that is linked to advertising Salesforce
Core technology
Customer-friendly initiatives
Non-Web customer contact, such as catalogues and telesales (they maximise revenues)
Reliable fulfilment systems
CRM systems

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