From spending dollars to saving paise : Back to basics of cost cutting

When I came to Mumbai in early 2007 , there was a barber down the street Near my hostel . Unlike many others in the main road it was slightly on the off road and no frill barber shop where other jazzy shopes charged 75 to 90 per hair cut this guy charged only 25. Initially he had equipment only enough to support his operations plus a music system. After some visits I started noticing the change in the shop , old music system was a gone and a new one with surround sound was purchased , entire front wall was replaced with glass walls and than came the AC. He now even has a TV inside the small shop. Talking about charges it has gone up slightly from 25 to 30 which I feel was acceptable given the kind of facilities he has added, specially the AC ( and yes give some credit to inflation as well).

What was the necessity of adding so many facilities which are none essential to his operational activities , he can give many logic1) To attract more customers from higher end who would like to have thier hair cut in AC saloon2) To make waiting time of customers more comfortable 3) May be it is for the owners own comfort , he had positive cash in flow , he thought why not make life more fun at work for myself and employees.

Once all the facilities are set up now he does not have any way to track which facility is adding how much to his income , customer retention or operational efficiency , he has not even made any effort to do so. Each of these facilities have definitely increased his expenses to a significant level. So much so that now he may be working on a very thin margin and any change in market will make his operation unsustainable , what if tomorrow a no frill shops start in neighbourhood ( just like he was two year back) , it will surely take away atleast 25-30% of his customers who are not bothered much about AC and music in the saloon.

Recently in a discussion with one of the professior at SPJIMR , he mentioned that IT firms had a tendency to spend lavishly when cash flow was good and margins were high , this is what has put them in all kind of troubles today however small firms are always conservative in thier spending . I will have a slight difference of opinion here , It is normally characterstics of any individual or organization to climb up the spending ladder as his income grows. He is always attracted by some thing which seems just a little better and little expensinve than what he already has.

The Barber down the street is just an example , even a vegetable hawker would try to add facilities for his comfort as and when income grows ( not necessarily this will add to his revenue). So it is common tendency , and this is the entire focus of cost cutting in bad days. To some extent IT companies did over spent in building those glossy structures and than they needed to hype up salaries of their employees because thier global counterparts were ready to poach trained and groomed talent at almost double and triple the cost. Once upon a time the indian BPO employee used to get around 2200 $ a year which was 1/15th of what thier US counterpart would get but now this difference has narrowed down to 1/8 and very soon it could have been to 1/4 eliminating the very basis of competitive edge which was delivered by Indian vendors , probably a good cost control in bad times will again take organizations to some basics.