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Business Services Industry

TRIMMING the fat

Entrepreneur, March, 2001 by Mark Henricks

YOUR BIG, BLOATED COMPANY IS COSTING YOU AN ARM AND A LEG. MAYBE IT'S TIME TO CUT BACK.

BEFORE GETTING A GOOD DEAL ON OFFICE SPACE FROM AN OUT-OF-BUSINESS DOTCOM, EARL MOLLERUD'S OFFICE WAS ON THE THIRD FLOOR OF A WING OF A CHURCH. "IT WAS TOUGH DURING THE SUMMER BECAUSE THEY DIDN'T HAVE AIR CONDITIONING, AND DURING THE FALL THEY WERE SLOW ABOUT TURNING ON THE HEAT," SAYS THE CEO AND COFOUNDER OF KIDS' HAIR INC. IN MINNEAPOLIS. BUT, HE NOTES, THE RENT WAS A SAINTLY $500 PER MONTH.

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Today, Mollerud, 40, cuts the cost of getting supplies to his 10 Kids' Hair salons by ordering centrally and stocking consumables at headquarters. Each Monday, managers return from sales meetings bearing a week's worth of haircutting supplies. "Instead of having somebody drive around delivering," he says, "they just take it back in their curs."

But Mollerud is no miser. In an industry where employee benefits of any kind are rare, he offers stylists a company-paid health insurance plan. "And it's the best one we can get," he adds. And while other stylists book appointments in cheap paper planners, Kids' Hair has invested in a central computerized appointment system that contains information on customers' personal hair problems, preferred hairstyles, frequency of visits and other grooming concerns.

There's really no conflict between Mollerud's spending on some items and pinching on others. He and entrepreneurs like him use a technique resembling liposuction, a surgical procedure that removes fat from areas where it's not needed or wanted, to target only certain costs for removal. Rather than putting their entire organizations on stringent diets, they siphon off only costs that add no value. In the process, they say, their profits grow, their companies get stronger, and their understanding of their businesses increases.

Big, across-the-board cost-cutting, chiefly characterized by massive layoffs, was a fad among large corporations in the 1990s. Companies laid off more than 700,000 people during 1999 alone, according to career services and placement company Lee Hecht Harrison. But that kind of cost control failed to catch on among entrepreneurs. One reason is that small companies are leaner than large companies, so huge cost curtailment risks cutting beyond fat and into muscle. "If you take it off companywide, you're taking off things you need," says Jeff Olson, 43-year-old co-founder of Velocity Business Publishing, a book and e-book publisher in Bristol, Vermont.

With robust sales growth, cost savings seems unimportant to many entrepreneurs. Jeff Musa, founder and president of Cutting Edge Software Inc. in Dallas, is a typical case. "Our business is in exponential growth mode," says Musa, 43, whose five-person company writes spreadsheet software for Palm Pilot handheld computers. "Worrying about costs just drags us down."

Entrepreneurs don't appear to be suffering for their lack of cost concern. In 1998, annual business bankruptcies were down 31.6 percent from 1990, according to the American Bankruptcy Institute. But with a slowing economy, 2001 should see more bankruptcies. "Even if the economy's good," says Olson, "individual companies can certainly be mediocre--and worse."

Though survival may not be a burning issue for most firms at the moment, the seeds of the next age for cost control. may already be sown, according to Wil Uecker, an associate dean at the Jones Graduate School of Management at Rice University in Houston. Shoppers of all kinds can now compare prices for many products and services using Internet search engines, online trading and shopping services such as Priceline.com and eBay. "The comparison shopping that now exists means you have to be cost-effective," says Uecker.

Finally, no matter how robust your condition, it could always be better. Liposuction cost-cutting produces savings that beautify the bottom line--even if the top line looks the same. "What it's all about is profit," reminds Mollerud. "Whatever you can bring to the bottom line strengthens the company."

BEFORE GOING UNDER THE KNIFE

Intensive scrutiny of costs is essential if you run a grocery store or other business with very low margins. But liposuction-style cost-cutting can benefit almost any entrepreneur. "With every business I've been in, costs sprout and spread like weeds" says Olson, who started typesetting and reference publishing companies before beginning his business-book enterprise four years ago. "So every now and then, it's good to spray a little weed killer."

Before starting liposuction, however, you have to determine what to cut. One way is to use activity-based costing. This technique assigns costs to business activities, such as answering help-desk calls and stocking parts bins, and can help to identify which costs contribute and which can be trimmed.

With accurate cost information in hand, you can decide on an overall cost-cutting goal. One way is to compare your costs to competitors'. Annual Statement Studies, published by Robert Morris Associates of Philadelphia, lists actual costs and other financial info for more than 140,000 mostly small and midsize companies in 525 industries. By finding the category most closely approximating your company's size and industry and comparing your costs to those companies', you get an idea of whether you're high, low or just right, Olson says.

Business Services Industry

TRIMMING the fat

Entrepreneur, March, 2001 by Mark Henricks

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