The Downsizing Dilemma (Part 3)

In part 1 and part 2 of this 3-part series on downsizing your MSP in response to external and internal economics in a volatile business climate, we first addressed the difficult subject of workforce deductions, as well as how to reduce personnel-related costs without taking the drastic step of laying off employees and the option of downsizing the physical facilities. In part 3, we’ll talk about downsizing strategies that avoid cutting of personnel or physical space.

One area in which you may be able to save money is advertising/marketing. If you’re in downsizing mode, it’s not always necessary to continue with the same investments that were beneficial when you were in growth mode. If you’re cutting back in other areas, you may already have all the customers you can handle with your current personnel and facilities. In that case, spending money on activities that are designed to attract new customers doesn’t make sense, until you’re able to plan for servicing those new customers.

This doesn’t mean you should stop all marketing efforts, but you can cut costs dramatically by switching tactics. For instance, if you aren’t actively seeking new customers, you can cut out high-priced four color ads in industry publications and focus on things like email newsletters to existing customers. You can also use low cost tools such as social networking sites to keep your company’s name “out there” without spending a lot of money.

Advertising/marketing is just one example of your company’s discretionary spending that you may be able to downsize. Discretionary expenses are those that aren’t absolutely necessary – or fixed in amount – for the operation of the business. This might include certain maintenance costs, such as those that are primarily aesthetic (for example, new paint for aging interior walls). However, it’s important to distinguish between those maintenance activities that can be put off with no negative ramifications and those that may end up cost you more in the long run if you delay them, such as repairing leaking water pipes.

Some expenses are essential, such as insurance for your business, but you can save a good deal of money by shopping around and/or increasing your deductibles or cutting the premium by eliminating some aspects of coverage that are less likely to be used.

You may also be able to negotiate price reductions with your current vendors, who might give you a “deal” rather than lose your business altogether. It never hurts to ask. When you must make any large purchase, whether for capital equipment or contractual services such as janitorial services, it pays to always get multiple bids rather than just go back to your familiar vendor or renew your current contract automatically.

Analyze the professional services that you’re paying for and whether you can save money by having some work (such as bookkeeping) done in-house by an existing staff member who has the time and expertise. Look at ways to cut attorney fees by handling some negotiations and routine document preparation yourself and just having the attorney review the contracts rather than spend hours of his/her time doing the negotiating.

Look at how you can cut things such as printing expenses. In today’s digital world, many companies are still doing a lot of unnecessary printing, and the cost can add up. Do you really need that document printed in four colors on glossy paper?

When you downsize, you may find yourself with equipment that you no longer need. Don’t just store it somewhere, which costs money and/or precious facility space. Sell it or lease it out to someone who can get some use out of it. If your downsizing results in having more office or facility space than you need and it’s not feasible or cost effective to move, consider subleasing the extra space to another business (of course, you need to find out whether the terms of your own lease permit this).

It might seem counter-intuitive, but there are times when the most effective strategy for increasing your profit margins may be to downsize your client list. An objective evaluation may reveal that you have some customers to which you devote so much time and resources that you barely make any money – or even lose money – by providing them with services. “Firing” these high-maintenance clients can reduce your operating expenses and open the way for more profitable customers without having to add personnel, equipment or other costs.

Of course, if you find this is the case, before you start dropping clients that are a drain on your resources you must consider the terms of your contractual agreements and what your legal obligations to the customer are, and it’s also important to factor in the potential impact on your company’s professional reputation that could result if you end the business relationship.

Something else to look at is cutting back on the services you offer. You may find that some are generating much less income than others in comparison to the cost of providing them. One downsizing approach is to reduce the number of services and focus on those that are most profitable. Since your less profitable customers are often less profitable because they’re buying your less profitable services, cutting those services may also result in your losing those customers – without having to explicitly drop them.

Summary

Downsizing is never easy, and it goes against our expectations that in order to thrive, a business must continue to grow, grow, grow. But sometimes downsizing is the only way a company can survive. However, there are many ways to downsize, and not all of them involve laying off employees or painful salary cuts. If your MSP finds itself in the position of needing to downsize in order to keep going, the first step should be to analyze all of your options and choose the combination of cost-reducing actions that can put you back on the right track with the least amount of discomfort and disruption.

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