Management
Jan 07, 2020

Why Cost-Cutting fails as a strategy?

There is constant pressure on businesses to improve margins through cost-cutting. Most of them find opportunities by identifying areas that can receive a 10% trim or even a 100% trim.

Cost-cutting continues to be a standard business practice. In fact, more companies could soon engage in cost-cutting with talk of recession in the air. People, processes, and systems are examined and restructured to reduce costs and increase customer satisfaction that often leads to increased sales and heightened profitability.

But an improper and chronic cost-cutting holds the power to create opportunities for new brands to out-premium the premium brands.

Cost-cutting programs in software development are as prevalent as other industry domain. But inappropriate cost-cutting can have an adverse effect on software quality…

The cost… 9-digit failures and defects

Last year, Boeing 737 Max crash killed 157 people aboard immediately after takeoff. It was due to a computing system failure of its life-critical system. Boeing’s over emphasis on cost-savings made them outsource engineering to cheap contractors to try to increase production bandwidth. The consequent software failure cost them $6 billion dollars overnight.

Software failures and nonperformance is expensive. According to a survey report by Tricentis, software failures caused around $1.7 trillion of financial losses to 314 companies. Whereas, software bugs were the most common reason behind these failures.

The failure of cost programs in software development can be linked to multiple factors, including: challenges in implementing the initiative, poor design, and tracking, etc. Let’s have a look at few takeaways from software failures due to improper cost-cutting.

Why cost-cutting initiatives fail?

Broken street lamps

Valuing cheap over quality:

Fostering an engineering culture where management values cheap and fast over quality software and continuous progress will have a tremendously negative impact on both the timely delivery and quality of your software – as buggy software takes longer to build.

Wrong outsourcing:

Companies often tend to partner with outsourcing vendors quoting lower than the proposal. And eventually realize that the low software development rates don’t necessarily mean best price-quality ratio. It is important to pay attention to the organization’s reliability and their understanding of basic market research.

Cutting R&D expenses:

Without spurring cutting-edge R&D, companies leave loopholes in evaluating product and respective improvements. Such improvements are cost-effective that are needed to be implemented during the development phase.

Underestimating testing:

Testing is basically done to make sure that the software runs without bugs. But, if testing is done when the code is in production or prior to the complete development, debugging becomes more expensive.

Breaking down cost-cutting in stages

Man climbing coconut tree

Why cost-cutting programs of many companies end up making short-term financial gains at the expense of long-term business performance and health? Let’s divide cost-cutting into 3 stages providing a perspective to that question.

  • Stage 1: At initial stage, cost-cutting harvests the low hanging fruit and is well worth doing.
  • Stage 2: And when there is no more low hanging fruit left to harvest, it takes a lot more work to make cost savings materialize, and the return from that work decreases.
  • Stage 3: Eventually a cost-cutting strategy runs out of costs to cut and the effects of unwise cost-cutting starts to damage the business.

When fast is slow and cheap is expensive

Two neighbourhoods poor and rich

We are used to trade-off time, quality, and cost. This is where the businesses face challenges when asked to pick any two. The cost-price-time triangle suggests that it is not possible to optimise all three. As, all three properties of the project are interrelated – one will always suffer. In other words you have three options:

  • Design something cheaply and with high quality, but it will take a long time
  • Design something cheaply and quickly, but it will not be of high quality
  • Design something to a high standard and quickly, but then it will not be cheap

People involved in a software development process are typically motivated with different goals. Some are motivated to publish software quickly whereas some want to be sure that a solid and mostly error-free product is being introduced to the market. Cost-cutting plans are based on such motivations taken on priority.

There is a thin line between good and catastrophic cost cutting. A proper plan of gradual cost cutting can save and even make you money but a cost-cutting initiative that focuses only on immediate benefits, is doomed to fail. Because haste makes waste.

By Aaditya Mandloi

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