Trimming The Fat 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 anout-of-business dotcom, Earl Mollerud's office was on the thirdfloor of a wing of a church. "It was tough during the summerbecause they didn't have air conditioning, and during the fallthey were slow about turning on the heat," says the CEO andco-founder of Kids' Hair Inc. in Minneapolis. But, he notes,the rent was a saintly $500 per month.

Today, Mollerud, 40, cuts the cost of getting supplies to his 10Kids' Hair salons by ordering centrally and stockingconsumables at headquarters. Each Monday, managers return fromsales meetings bearing a week's worth of hair-cutting supplies."Instead of having somebody drive around delivering," hesays, "they just take it back in their cars."

But Mollerud is no miser. In an industry where employee benefitsof any kind are rare, he offers stylists a company-paid healthinsurance plan. "And it's the best one we can get,"he adds. And while other stylists book appointments in cheap paperplanners, Kids' Hair has invested in a central computerizedappointment system that contains information on customers'personal hair problems, preferred hair styles, frequency of visitsand other grooming concerns.

There's really no conflict between Mollerud's spendingon some items and pinching on others. He and entrepreneurs like himuse a technique resembling liposuction, a surgical procedure thatremoves fat from areas where it's not needed or wanted, totarget only certain costs for removal. Rather than putting theirentire organizations on stringent diets, they siphon off only coststhat add no value. In the process, they say, their profits grow,their companies get stronger, and their understanding of theirbusinesses increases.

State Of The Market

Big, across-the-board cost-cutting, chiefly characterized bymassive 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 HechtHarrison. But that kind of cost control failed to catch on amongentrepreneurs. One reason is that small companies are leaner thanlarge companies, so huge cost curtailment risks cutting beyond fatand into muscle. "If you take it off company-wide, you'retaking off things you need," says Jeff Olson, 43-year-oldco-founder of Velocity Business Publishing, a book and e-bookpublisher in Bristol, Vermont.

With robust sales growth, cost savings seems unimportant to manyentrepreneurs. Jeff Musa, founder and president of Cutting EdgeSoftware Inc. in Dallas, is a typical case. "Our business isin exponential growth mode," says Musa, 43, whose five-personcompany writes spreadsheet software for Palm Pilot hand-heldcomputers. "Worrying about costs just drags us down."

Entrepreneurs don't appear to be suffering for their lack ofcost concern. In 1998, annual business bankruptcies were down 31.6percent 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-andworse."

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

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

Before Trimming Back

Intensive scrutiny of costs is essential if you run a grocerystore or other business with very low margins. Butliposuction-style cost-cutting can benefit almost any entrepreneur."With every business I've been in, costs sprout and spreadlike weeds," says Olson, who started typesetting and referencepublishing companies before beginning his business-book enterprisefour years ago. "So every now and then, it's good to spraya little weed killer."

Before starting liposuction, however, you have to determine whatto cut. One way is to use activity-based costing. This techniqueassigns costs to business activities, such as answering help-deskcalls and stocking parts bins, and can help to identify which costscontribute and which can be trimmed.

With accurate cost information in hand, you can decide on anoverall cost-cutting goal. One way is to compare your costs tocompetitors'. Annual Statement Studies, published byRobert Morris Associates of Philadelphia, lists actual costs andother financial info for more than 140,000 mostly small andmidsized companies in 525 industries. By finding the category mostclosely approximating your company's size and industry andcomparing your costs to those companies', you get an idea ofwhether you're high, low or just right, Olson says.

Once cost-cutting is underway, you can see how well you'redoing by comparing your effectiveness against competitors in thereal world. And even if you're winning your share of the marketand earning profits, explains Uecker, your cost-cutting has tocontinue.

Cutting Costs

Once your goals and monitoring mechanisms are in place, it'stime to find and surgically remove the most wasteful activities andexpenses. Olson likes to cite a maxim from business author JimSchell: "Avoid waterfalls in the lobby." The idea is thatyou can safely eliminate any cost that adds little or nothing tothe value of your service or product.

Employees are the first place to look. "Not only are youpaying them salary and benefits," says Olson, "but youhave to provide them with equipment, space and supervision in theform of managers." When you add all that up, a full-timeemployee may cost $100,000 a year. "Getting rid of 10managerial or professional employees can save you a milliondollars," Olson says.

		Oneway to keep costs down is to make sure all your product lines arestrong sellers. Not sure how to do that? We can help you evaluatewhether you've got a loser in Better Off Dead.

But don't just start slashing workers. Instead, ask yourselfand your managers whether you can justify the workers you have.Says Olson, "Everybody on the payroll must be doing somethingthat must be done and that can't be done cheaper."

If you have a job that must be done but isn't being done ascheaply as possible, look first to outsourcing. Uecker, who handlesexecutive MBA and executive nondegree programs at the JonesGraduate School, says the outsourcing of routine tasks, such asmaking copies or supplying the office coffee machine, frees up hisstaff for more important duties.

Even Musa, admittedly not an avid cost-cutter, says, "Wesometimes use consultants instead of high-priced [employees] to dothe same job." The difference in outsourced help, he says, isflexibility. "It's not a recurring cost. It'sterminable."

Musa also exercises discretion in hiring outside experts.Attorneys and other expensive professionals shouldn't beoverused, he says. "You can probably cross out one point on acontract and sign it without running it by legal again, althoughthey want you to," he says.

Also, selling any idle equipment or outdated inventory on whichyou may be paying taxes and expending maintenance can generate cashwhile reducing outlays. "I'm constantly surprised at whatcompanies keep on their books," says Olson, who recalls onecompany whose bankruptcy filing revealed it owned a condo in Hawaiifor the convenience of vacationing executives.

Next stop: your products and services. Selling products thatdon't produce profits and services that don't enticecustomers can be hugely expensive. "In every company I'veworked for, people tried to push products the market wasn'tresponding to," Olson says. "It means you're justspraying out costs."

Don't just focus on products and services, Uecker advises.Look also for customers who aren't carrying their weight. Smallcompanies desperate to boost sales are especially vulnerable totaking on customers who promise large revenue boosts butwho-for reasons like excessive service requirements, slowpayments or demands for discounts-produce low profits or evenlosses, he says.

Keeping Costs Down

For growing companies, it's often more important to avoidnew costs than to trim existing outlays. Before adding any cost,ask whether it will benefit customers, or only you. That's whyMollerud operated out of a church sublet. With annual salesexceeding $2.5 million, he could have easily afforded moreluxurious space. But, he says, "that doesn't matter to ourcustomers."

New expenses that commit you to long-term outlays should bescrutinized with an especially vigilant eye. Musa declined a shotat a low-priced high-speed Internet connection because hedidn't need that much bandwidth. "We do a double take atrecurring costs or anything that requires us to make a long-termcommitment," he says.

Some expenses probably shouldn't be cut. Never scrimp onanything that affects your value proposition or your corecompetency, Uecker says. "What is it you really bring to themarket?" he asks. "You never want to cut there."

For Mollerud's business, that means not reducingcompensation for stylists staffing his salons. "You can'tkeep staff if you don't pay," he reasons. "So we tryto find ways for them to make even more money." Liposuctionmeans doing the right thing in the right place. Like a plasticsurgeon who does a tummy tuck here and injects some collagen there,financial surgery builds up a company in critical areas whiletrimming nonessentials.

For most small companies, the issue is not so much reducingcosts as finding the best possible allocation of resources. SaysMollerud: "Our philosophy is to optimize costs, not minimizecosts. If we can add costs in a way that benefits the business, wedo."

Mark Henricks is Entrepreneur's "CuttingEdge" columnist.

Contact Sources

• American Bankruptcy Institute, www.abiworld.com
• Cutting Edge Software Inc., (800) 991-7360, www.cesinc.com
• Kids' Hair Inc., emollerud@yahoo.com
• Robert Morris Associates, www.rmahq.com
• Velocity Business Publishing, (802) 453-6669, www.agilemanager.com