Variabilize Your Cost Structure
In a recession, fixed costs are a liability. The more fixed costs you have, the more revenue you need to generate to break even, and the harder it is to rapidly scale up or scale down. By variabilizing your cost structure—reducing fixed costs and shifting to a more variable cost base—you can significantly increase your capital efficiency and financial flexibility.
There are two primary levers for cost variabilization: 1) large-scale cost reduction initiatives, where fixed costs are rationalized; 2) cost transformation, where fixed costs are converted into variable ones. The former typically involves the elimination of low-value activities and overhead—familiar territory to most businesses. The latter, on the other hand, can involve anything from outsourcing and offshoring to new contract financing agreements to operating model changes. For instance, a manufacturer may opt to sell off equipment it owns and shift to renting on a pay-per-use basis. Or a biopharmaceutical company could opt to contract out all clinical trials instead of continuing to own its own lab facilities. It is not an either/or—used in concert, these two levers can drive significant cost savings and scalability. For example, you could consolidate your IT portfolio to reduce fixed IT costs—and you could shift IT provisioning to a pay-as-you-go cloud computing model.
Variabilizing your cost base requires a clear understanding of what’s important and what’s not—and a willingness to challenge the status quo. No historical costs are set in stone; you need to validate the effectiveness of and return on capital deployment.
How to Variabilize Your Costs
- Establish internal benchmarks, identifying what constitutes the “best of the best” and the “worst of the worst” to pinpoint the low- or no-value activities.
- Optimize your staffing by reducing the layers between management and the client.
- Map out costs distribution by market, product/service line and customer vertical.
- Leverage the 80/20 principle to methodically reallocate resources away from lower-value activities to the business activities of highest value.
- Reimagine your biggest fixed costs—negotiate variable payment terms with suppliers, outsource noncore business functions or shift from asset ownership to renting for access.