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Cost Cutting is a Downhill Street with a Cliff at the End

There is a perception that the way to survive in a difficult or slow economy is to cut costs.

By Dr. Joe Webb
Published: July 30, 2008

There is a perception that the way to survive in a difficult or slow economy is to cut costs. It's understandable, but it's a misunderstanding of what costs are.

Costs and expenses are different. A cost is an outlay from which you expect some kind of return. This is why the income statement has a section “cost of goods sold.” You don't produce something unless it will be sold. An expense is any other outlay. This is why factory labor is a cost, and sales and administrative payroll is an expense.

Costs emanate from the capital investment decisions that owners make. The kind of press and other equipment that are in a printing plant were based on the kinds of print materials that were needed at a particular point in time by a particular print buying audience. Because capital equipment is purchased for many years of service, the assumptions that justified their original purchase may no longer be in sync with the the market as it exists today and will in the future.

So to change costs, companies have to change the nature of their core capital investment base, and can't really nibble around the edges with a cut here and a spending reduction there.

Cost cutting, as described by many managers, does not change the core nature of their business operations.

There are still executives who think that a stronger economy will change their business. It can't and it won't. There has been a significant change in the nature of print demand that means the installed base of equipment (and the knowledge and ability to operate it) is not appropriate to that evolving marketplace.

There are other differences as well. In the past, costs of materials and labor would, eventually, be passed to the buyers. Today, there is greater competition for those media and communications dollars. Often, those media are far less expensive. A basic web site serves the same purpose as a brochure, and once active, does not need the actions of the web site owner to deliver the communications to its reader. That is, no one has to mail the web site in an envelope to someone. They view it on their own computers.

Printing prices are not even keeping up with inflation, and have not for years. The Industry Snapshot table below is the Producer Price Index, in other words, the change in the average selling price for commercially printed materials. It's up by less than 3%. The prices of consumer goods are working their way to 6%. The overall Producer Price Index is running around 9%. As I have said before, print is getting cheaper every day because its prices are going up less than inflation, but the costs of media competitors are still getting yet cheaper than that.

By focusing on cost cutting, we end up producing goods people want less of with greater efficiency.

While the trend for more digital communications is long and constant, the other critical trend is that the coming generation of business communications users is of the mind that printed communications are a serious blight on the earth's resources. When they're not, they can be made only less so. Therefore, totally avoiding print is preferred. (No matter what the costs or environmental implications of transporting all those electrons, this is an unseen aspect of digital media, and what is unseen does not exist).

Anyone looking to ride out the current economic state in light of the technological trends and the social actions of younger consumers and executives is kidding themselves. Cost cutting can't hack it. In fact, the cutting is rarely surgical, but is often like hacking at a business with an axe. Everything is connected in a business, and a cut in one place can mean that another function may have to pick up the slack, increasing their costs in unforeseen ways.

Cost cutting can only be accomplished by changing the origination of those costs, and that is rethinking the purpose of the business and the capital equipment and other investments that naturally flow from that.

Depreciation laws are one of the structural factors that cause many printers to hold onto equipment far beyond their marketing lives, and that's an important concept. The marketing life of equipment is shorter now than it ever has been, and will probably be less. Leasing equipment for shorter durations, where possible, may be a way of decreasing long term costs and removing significant market obsolescence risk from businesses.

There are other factors. These are good times to put that blank sheet of paper in front of you and rethink your business from scratch, only if you have the courage to act on it. One phrase I read in a blog in another industry stuck in my mind. “Cost cutting is a downward street,” it claims, “and it ends with a cliff.” Keep that in mind when the only alternative being explored is a nip and a tuck to a budget. Higher costs may actually be the answer if those costs produce what the marketplace wants.

Print buyers don't buy your costs. They buy what print does as a medium. Your costs today were decided years ago. That's why they call it strategic planning. Does your strategic plan still make sense today and tomorrow?

Dr. Joe Webb is one of the graphic arts industry's best-known consultants, forecasters, and commentators. He is the director of WhatTheyThink.com's Economics and Research Center.

What do you think? Please send feedback to Dr. Joe by emailing him at drjoe@whattheythink.com.

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