There are few phrases more reassuring in business than, ‘We’ve always done it this way.’
It suggests experience, stability; a process that has been tested over time. And sometimes that is exactly what it represents. But sometimes it means something rather different: a decision made five, ten or twenty years ago, under completely different circumstances, which nobody has thought to question since. The supplier who has always supplied you, the customer who’s always received that discount, the product you’ve always stocked, or the report that somebody spends half a day producing every month.
Individually, none of these things may look particularly significant. Collectively, however, they can represent a substantial hidden cost. And when margins are under pressure, questioning them can be considerably more valuable than simply asking everyone to spend less.
When Decisions Become Habits
Most inefficiency doesn’t begin with a bad decision. Quite often, in fact, it begins with a perfectly sensible one.
Imagine a growing business that negotiates preferential terms with a major customer who represents a significant proportion of revenue. At the time the discount makes commercial sense, guaranteeing volume and cementing a relationship. But as the business grows, its cost base increases and the customer’s business represents a smaller proportion of overall revenue. Not only that but perhaps service expectations increase, delivery costs rise, and the original margin gradually narrows.
But, all the while, the discount remains. Why? Because that was the agreement. Because they were an important customer. Because nobody wanted to risk upsetting the relationship. Or simply because that was simply how it had always been done.
The decision itself wasn’t necessarily wrong. What changed was the context around it, and that distinction matters.
The Cost of Sacred Cows
Every established business accumulates sacred cows. They rarely appear in the accounts under a convenient heading marked ‘Things We Should Probably Reconsider.’ Instead, they’re buried throughout the organisation:
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Long-standing supplier relationships that are no longer competitive
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Historic customer discounts that have quietly eroded margin
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Products or services maintained because “customers expect them”
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Manual processes created before better technology existed
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Reporting that consumes time but informs few decisions
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Stockholding policies based on historic rather than current demand
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Roles and responsibilities designed around a business that no longer exists
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Pricing structures inherited from very different market conditions
The problem is that longevity gives decisions a value they may no longer have. And once something has been done for long enough, people stop asking why and start explaining how. And that is when a decision becomes a habit.
Why Uncertainty Makes This More Important
When trading conditions become difficult, the natural instinct is often to protect what you already have. Don’t upset customers. Don’t change suppliers. Don’t alter the product mix.
Don’t take unnecessary risks. There’s a certain amount of good sense in that. Uncertainty is rarely the moment for reckless experimentation. But protecting the business and protecting every historic decision the business has ever made are not the same thing. In fact, uncertainty can be one of the most useful times to challenge established assumptions. When margins are tightening, the question isn’t simply: ‘Where can we cut?’ It might be: “If we were designing this business today, would we still choose to do this?”
That is a very different conversation. Instead of trimming a few percentage points from budgets across the organisation, it asks whether the underlying allocation of money, people and effort still makes sense.
Margin Can Disappear
One of the difficulties with legacy decisions is that their cost often accumulates gradually.
A supplier becomes 3% less competitive. A customer discount becomes slightly too generous. A manual process takes an additional hour each week. A low-margin service absorbs a little more management time. None of these is likely to trigger an alarm,
but multiplied across hundreds of transactions and twelve months of trading, small inefficiencies become meaningful. More importantly, because they are embedded in normal operations, they can become almost invisible.
The business may conclude that “margins are getting tighter” as though this is simply something happening to it. Sometimes it is. But sometimes part of that margin is disappearing because the business is still operating according to assumptions that belong to an earlier version of itself.
The Role of Financial Leadership
This is where good financial leadership should do more than explain last month’s numbers.
An experienced FD or CFO can use those numbers to ask better questions.
- Why has the margin on this customer changed?
- What does this product actually contribute once all the associated costs are included?
- Why are we buying from this supplier?
- Why do we hold this much stock?
- What return are we getting from this expenditure?
- Why does this process work this way?
And, perhaps most importantly: “If we weren’t already doing this, would we choose to start doing it now?”
Those questions are not about cutting for the sake of cutting. They’re about understanding whether the resources of the business are still being deployed deliberately. That requires financial analysis, certainly. But it also requires commercial judgement, curiosity and enough independence to question assumptions that people inside the business may have stopped noticing.
Not Everything Old Is Wrong
Of course, challenging a sacred cow doesn’t mean slaughtering it. A long-standing supplier may turn out to offer exceptional reliability that justifies a higher price. A generous customer discount may underpin a relationship whose wider value is considerable. A seemingly inefficient process may protect the business from a risk that isn’t immediately visible on a spreadsheet. The purpose of questioning these things isn’t to prove they are wrong. It’s to establish that they are still right.
There’s an important difference between doing something because you have considered the alternatives and decided it remains the best option, and doing it simply because nobody remembers deciding to do it in the first place.
A Useful Question for Your Next Management Meeting
So, rather than beginning your next cost or margin discussion with:
“What can we cut?” Try asking: “What do we do today purely because we’ve always done it that way?” You may be surprised by the conversation that follows. Because in a period of uncertainty, the businesses that emerge strongest will not necessarily be those that defend the status quo most successfully. They will be the ones capable of distinguishing between the things that make them strong and the things they have simply become accustomed to.
At Tectona, our part-time FDs and CFOs help growing businesses take that outside view — using financial insight and commercial experience to challenge assumptions, identify hidden drains on margin and make sure resources are being used where they create the greatest value.
If you’d value a fresh perspective on the financial health of your business, start with our free Financial Health Check or get in touch with Mark Nicholls for an initial conversation.