Definition: Cost Containment is a business strategy that involves cutting expenses to increase profitability or to remain sustainable over time. It is a practice where extraordinary expenses are reduced to a minimum and companies look for ways to diminish all its regular operating costs.
What Does Cost Containment Mean?
This strategy is employed during different scenarios or business stages and it mainly involves the creation of policies that aim to reduce the overall overhead costs of the organization. The most frequent scenarios where cost containment procedures are employed are economic recessions and demand pull-backs. On the other hand, startups (newly formed businesses), also implement these measures to reduce their ongoing burn rate (the rate at which they burn their capital reserves), to keep a sustainable business until it starts generating money.
Cost containments programs begin with an income statement analysis that identifies the biggest expense items of the company. After that, a lot of digging is done to classify and recognize the sub-classes that take the most money out. Often, companies reduce their marketing budget or downsize the organization’s staff structure, since these are normally the biggest financial items in most cases. Nevertheless, proper due diligence normally unveils expenses that, in the aggregate, can reduce overhead costs substantially.
Example
Marshall is the Chief Financial Officer of a company called Big Apple News. The company functions as a digital news source for the state of New York and it has been very successful among the financial community, since the company offers real time information about market and company developments. Recently, the company was hit by an alleged misinformation scandal where a local authority was vilified through the website in a featured blog post.
The company suffered financially from the lawsuit that came after and Marshall, as the person in charge of the financial administration, had to implement a cost containment program to guarantee the company’s sustainability during this temporary recession. This program included measures such as a cutback in the number of external sources hired, a reduction in online advertising and less use of photos bought from external sources. These measures will help the company navigate during these difficult times to remain operational for the following years.
