Irony of Cost Cutting

The Irony of Cost Cutting is the manner, how it is handled?
When an instruction to cut cost, it goes like a whirlwind, cutting everything in the path, without analyzing what to cut and what not to cut. Any thing that you cut will be good in the eyes of the Boss.

I stop here to express that I write this article, as my journal, to show my frustration and my concern. It is my opinion, and it may be a fallacy. It can also be treated that 'thinking aloud' in a Kopitiam (coffee shop)

In a booming economy, Revenue (R) minus Cost (C) equals to Profit, so in order to maximize profit, increase in revenue and decrease the cost. very simple formula. But what happen in a RECESSION, Revenue is down, Cost is down and the Profit will definitely be following the effect of the two factors R and C. Instructions to cut cost are given, have they identified the real cost to cut, internal or external.

In my undergraduate day, studying the economic book by Paul Samualson, I was fascinated by the Paradox of Thrift. it is a paradox of economics propounded by J M Keynes. the paradox states that if everyone saves more, during the times of recession, then the aggregate demand will fall and will in turn lower total savings in the population, because of the decrease in consumption and economic growth.

Cutting cost is beneficial to each individual company but deleterious to the general economy. If every companies saves more money (that is the marginal propensity to save increases across all revenue levels), then the total revenues for companies will decline. This decrease in economic growth means fewer salary increases and perhaps downsizing.

in a simplistic view, everyone is looking for cost to be cut, the revenue of everyone will also decrease, eventually what is there left to be cut. So in the process, profit is never there, in this weak economy.
Too much cost cutting may harm the economy. You cut my cost, I cut yours. The level of revenue will fall across the board.

The company must undertake to examine and cut those cost internally. Take a team to look at the profit and loss statement. Examine the fixed cost first and then the variable costs of the company. Not every cost need to be cut. It needs to be adjusted.
As an example, cutting cost does not mean we turn off the light completely, and work with candles. One needs to walk around, and adjust the light, like two neon light, turning off one.

I do need to touch on "TRANSFER PRICING". The definition is " the setting of prices within an organization for goods or services, sold to other subsidiaries of the organization". In the booming economy, the prices of the services is already quoted very low as compared to the market, among the group. Now come the recession, the price is further cut to the bones!! I wonder how the subsidiaries are going to justify their existence.

In conclusion, in this global recession, maybe we do just the opposite, everyone means everyone does not cut each other's throat.. cost. It will bleeds to death!!!

I need to disclaim that this is my journal and it is only my opinion.