Q.  Times are tough and we need to cut costs.  How should we cut our SG&A and R&D costs?  (assume appropriate efforts are already underway to reduce costs in supply chain and elsewhere)

A.  This is a tough position that many businesses are in.  In many cases, how companies approach cutting SG&A and R&D investments may depend on the answers to 4 key questions that frame the problem:

1)  How much money must be cut from SG&A and R&D?

2)  How fast must the SG&A and R&D savings be realized?

3)  What are the high value market segments and who are the high value customers where we must hold our current position?

=>  Alternative question for a young life science or other technology company: What activities must progress if we are to obtain our next round of funding from investors or partners?

4)  Are there low hanging market opportunities created by the economic crisis (including issues that competitors are facing) that could generate significant near term cash flow if we re-directed some resources towards these opportunities?

=>  Alternative question for a young life science or other technology company: What assets can we sell fast, even if the price is low, and who is needed to sell and transfer the assets?

Notice that I used the phrase “SG&A and R&D investments” above – SG&A and R&D expenditures exist to generate a good return.  Whether these are appropriate or well managed investments at your company is a different topic.

Once the problem is framed, here are some ideas that may help:

*  If costs must be cut swiftly and deeply, some combination of across the board cuts and eliminating most or all of some functions may be the only real option; it’s not an ideal option because functions, projects, manufacturing locations, customers, etc. are not equal in their value creation potential

*  If there is time (days to weeks) to plan cost cuts or the cuts are not deep, focus on finding and scaling back the least value creating activities

*  Maintain the reliable supply of in-spec products, services, and associated customer interfaces with higher value segments and customers; make cuts (and increase prices) to lower value segments and customers first

 *  If possible, use bad times to better position the company for future good times; think about the future opportunities for the company and the “5 rights” – the right resources in the right place, doing the right activities, at the right time, with the right cost structure

*  Use remaining SG&A resources to find areas where prices may be raised (perhaps as a result of unfavorable F/X, raw material, or shipping economics) and identify unprofitable products where prices should be raised or sales halted

*  Be sure to retain key employees who drive value in your business; realize that key employees are not always obvious – they can include the 2 packaging operators out of 10 who know how to make the old packaging line run faster than any new line;  the customer service rep who knows the order patterns, special shipping instructions, and people at all of the sites of your most important customer; and the core scientists who understand the ins and outs of your technology and intellectual property in your field

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