Controlling Your Costs Is a Wrong Mindset to Use

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Control your costs. Manage your expenses. Reduce spending. Lower overhead

These are phrases, or variations of it, that everyone has heard before at one point in their corporate career.

However, if there’s one thing about expenses that people often don’t realize is that you can’t control or manage them. You can only cut them.

That might appear to be just a play on words, but the difference is huge.

Costs (or expenses) are the second half of the profitability framework.

“The question should be: ‘Would the roof cave in if we stopped doing this work altogether?'” Drucker explained. “And if the answer is ‘probably not,’ one eliminates the operation. It is always amazing how many of the things we do will never be missed.”

The Danger of Managing Costs Instead of Cutting Costs

You might have probably guessed by now that I love Peter Drucker. He is arguably the most brilliant management consultant of our time. That’s also why he is revered as the father of modern management.

That aside, the approach to managing costs is finding ways to make things more efficient; while the approach to cutting costs is completely different.

Allow me to explain further.

Managing or controlling costs—becoming more efficient— doesn’t change the way you look at things. You accept the status quo and just improve on it, or at least find a way to improve the situation. This is why every time you do this exercise, it is very difficult to reduce the expenses.

On the other hand, to cut costs means you have to first “identify the activities that are productive, that should be strengthened, promoted and expanded,” said Drucker.

So, after identifying these value-adding activities, those that don’t add value, you cut them altogether. I included some guidelines on how to do that below.

This way of looking at cost is radically different than traditional methods of efficiency. Instead of simply looking for cheaper alternatives or putting pressure on suppliers to lower their prices, you re-evaluate everything.

Two Simple Examples in Businesses

Before that, here are two examples where the two perspectives differ:

Example 1: Monthly Events

Your organization conducts monthly recurring events. This can be anything from sales rallies to parties to general assemblies. If you wanted to only reduce your costs, most of the time, you look at alternative venues, cheaper food, or negotiate with the speaker, etc.

But if you are looking at cutting costs, you’d start looking at the results that these events bring in (if any). Or, if it’s even worth doing these events.

Example 2: Annual Conferences or Leadership Training

You frequently go or send people to conferences or training. If you want to manage your costs, you look for cheaper alternatives like different speakers, or maybe invite them to your office instead.

But if you look at cutting costs, you question the value of these conferences. Or figure out if they provide value at all.

Change before you have to.

Jack Welch

This shift in perspective is vital if you want change to really happen.

What’s important, Drucker said, is to make this a routine exercise — not something that happens only during downturns: “Businesses that actually succeed in cutting costs don’t wait until they have to cut costs.”

4 Key Questions to Ask and Answer

  1. Ask “what is our mission?”
  2. Ask “Is it still the right mission?”
  3. Ask “Is it still worth doing?”
  4. Ask “If we were not already doing this, would we now go into it?

1. What is Our Mission

Asking what your mission brings me back to my other article—what’s the purpose of your business?

How do you fit in the bigger picture? How is your business creating value in society?

The reason why this is so important is that without customers, your organization will cease to exist. If you are not able to create customers and keep them, you are not creating value.

One word of caution especially for tech-related businesses—don’t be blinded by the technology by itself. Technological innovation is not the same thing as value innovation.

2. Is It Still the Right Mission

The second question forces you to rethink the value you are delivering.

Put this in another way, are you delivering any value at all? Remember, the more technology is involved in your organization, the higher the tendency to believe that you are creating real value to your customers.

It might also be that you have delivered value before have become complacent to the ever-changing needs of the market. These are the Blockbusters, Kodaks, and Polaroids.

They have become leaders in their own markets and provided a lot of value. But over time, they think that their market leader status was unmovable.

3. Is It Still Worth Doing

This next question can mean two things: (1) it can refer to the mission, or (2) it can mean about this activity that you want to look at. Basically, you ask if this “thing” that you are doing worth it?

Going back to my example above, if the events were being conducted but aren’t really adding value, then why do it?

  • Because it’s tradition
  • We’ve always done it this way.

I can tell you now that these are terrible answers.

One specific example comes to mind every time I ask this question to myself. Back when I was working in one of the subsidiaries of a company with over 700+ employees, I noticed some reports that took a few hours a month to make weren’t being used. No one was actually reading them. They were redundant reports that were a small subset of a bigger report which was the one being used.

Obviously, this was a big waste of time for the people doing it. But, until I have pointed it out, they were doing it just because that’s the way it has always been.

4. If We Weren’t Already Doing This, Would We Now Go Into It

Finally, this question makes you rethink about things you want to do or change. Most of the time, we feel that what we are doing isn’t enough. By asking this question, you’d know if introducing this activity (usually accompanied by costs) is worth even trying.

“The overall answer” Drucker added, “…is almost never ‘This is fine as it stands; let’s keep on.’ But in some – indeed a good many – areas the answer is, ‘Yes, we would go into it again, but with some changes. We have learned a few things.’”

The definition of insanity is doing the same thing over and over again, but expecting different results.

Albert Einstein

Bonus Example

Earlier I shared two examples without going into the details of cutting costs. Now that you’ve understood the 4 questions you can ask, here’s another example where you can apply those questions: perks.

Perks can range from free meals to higher benefits, to sports programs. Anything under the sun that the company provides for its employees.

Oftentimes, these are argued to increase productivity and foster camaraderie, and as part of employee engagement. That’s why businesses have budgets for them.

The key point here is determining what value are they adding? Are they really making your people more productive and motivated? Do the perks attract more potential hires and retain current employees? Does it really help collaboration across different teams? The list goes on.


Managing costs is different from cutting costs.

If you’ve followed the works of Drucker, and I suggest you do especially if you are in a leadership position in your organization, he always puts things into a bigger perspective. It’s not just about making money. It’s not just about your company. It’s always the customer and how you are creating value for them.

These four questions allow you to evaluate which activities are value-adding and which are not. You “double-down” on these value-adding activities and cut the ones that don’t.

Force yourself to ask these questions over and over to make sure you are still doing the right things. Or put it in another way, to make sure that you are still delivering value to your customers.

The Real Purpose of Business: Why Does Your Business Exist?

Person sifting through vinyl records

With a brand new year and a new decade, it’s a great time to step back and asses things in our life. No, you don’t need to add this to your New Year’s resolution. Rather, just take a few moments to ask yourself this question and answer it truthfully. 

“What is the real purpose of your organization?”

The reason I ask is that I met hundreds of business leaders like you throughout my entire professional life. And the one thing I noticed they have in common is they seem to have a disconnected view of businesses and organizations. And this includes the people I met when I was taking up my MBA. 

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What is the real purpose of a business?

The real purpose of a business is NOT to create profits. Because a business cannot exist outside of society and must satisfy a specific need in order to stay in business, it has to create or add additional value to the community or individuals. That’s why the real purpose of a business is to create customers.

What is the purpose of business? 

Is it to create profits? Be your own boss? Supporting an advocacy? Provide a community a livelihood? 

All these are great vision and mission statements. 

However, when you look at organizations in the context of society, the real and only purpose of organizations should be to create customers. 

Businesses Exist Because of Its Customers

Business enterprises … are organs of society. They do not exist for their own sake, but to fulfill a specific social purpose and to satisfy a specific need of a society, a community, or individuals.”

Peter Drucker

Peter Drucker, perhaps one of the best management thinkers of all time, said that businesses exist to fulfill a specific social purpose and to satisfy a specific need of a society. 

However, a lot of business owners think of organizations only from a capitalist mindset. Now, that isn’t bad nor wrong by itself. It’s just another way to look at it. But if that’s the only thing that enters your mind — to make money — you are looking at businesses in the wrong way. 

Allow me to provide you with another perspective.

Any organization won’t exist without customers. 

Now, you may hear about startups using fundings at the beginning, but they all die after some time because they can’t create customers who are willing to pay for their products/services. While they may have great ideas or cool offerings, if no one is willing to pay for them, they will eventually close. 

And this is also true even for non-profits. They have their own customers that they serve. Without them, they will also cease to exist. 

Understand Businesses as Part of Society

One of the most first things you learn in economics is the concept of supply and demand. The easiest way to grasp this concept is through the circular flow of income.

Circular Flow of Income (Simple)

In the image above, two things happen:

  1. Individuals supply their talents and skills (labor) to businesses in exchange for compensation
  2. While businesses use this to create goods and services which are then bought/availed by individuals

Of course, this is a very simplistic view of the economy. It’s much more complicated than that. But it is a great way to see the relationship between businesses and their customers. 

Market creation: two sides of the equation

Another concept in economics is that of markets. It’s defined as any structure that allows buyers and sellers to exchange any type of goods, services, and information —with or without money. 

Let’s not go down the rabbit hole here and talk about economics. Rather, what I’d like to highlight here is the market consists of two players — buyers and sellers. Or in our case, businesses and customers. 

Value Exchange

Customers are created when they find value in the product and/or service of the organization. What this means is they find something of value to them that they are willing to spend money in exchange for it. 

At this point, when a customer pays for a product or service, a sale or revenue is created. Two things happen here that is worth noting:

  1. The customer receives value he/she is looking when he/she gets the product or experience the service
  2. The organization receives value in the form of the payment of the customer

If you notice, there is simply an exchange of value from both parties. This is the primary message I want to impart here. 

Without this cycle (exchange of value from the organization to the customer and the customer to the organization), you and your organization will cease to exist. 

The market will cease to exist if value is not created for both parties. And when the value you provide is less than the cost, the business earns a profit.

This is also the reason why looking at organizations outside the context of society often results in failures. 

Most of the time, that happens because the decision-makers believe so much in the novelty of their ideas that it is not grounded in the basic premise of creating value for customers. This is particularly true to those in the tech industry

Food for Thought

So, now, let me ask you the question in a different way…

“Does your organization create value for your customers?”

The buyer utility map is one of my most popular articles as of this writing. It’s a great tool every business owner and leader should know. Feel free to check out the article. 

The buyer utility map is from the Blue Ocean Strategy. Its main use is to discover opportunities that your industry (or more specifically, you and your competitors) are missing. It also shows you where every player is investing heavily upon, but might not be providing value to the customers. 

One part of the buyer utility map is the buyer experience cycle. 

Generally, customers go through this cycle sequentially: 

  1. Purchase —> includes the time customers are looking for you until the moment they transact
  2. Delivery —> the moment after they pay to the point before they use it
  3. Use —> involves the usage of the product/service until its useful life
  4. Supplements —> coincides with the use of the product/service
  5. Maintenance —> deals with the useful life of the product/service
  6. Disposal —> starts when the useful life is over

Find Hidden Opportunities in Your Industry

Get this guide on how you can use the buyer utility map to find hidden opportunities in your industry + additional real-world samples from companies. 

At each stage of the cycle, there are specific questions you can ask yourself to determine whether or not you are providing value. I’m not going to repeat it here again, so I highly encourage you to read the buyer utility map too. 

Let me end with this. 

The more value you add across the buyer experience cycle, the higher the likelihood of you creating a customer and keeping your business alive. If you don’t, then over the long-run, your customers will no longer find value in the products/services that you offer and eventually leave. 

I hope that you learned something new today. Businesses aren’t meant to be viewed by itself; rather, it should always be viewed as part of a bigger whole — as part of the society we live in. Take this time to think about your business and the value you are creating for your customers.

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