a myth of reality

Businesses Reducing Costs Amid High Inflation – A Myth or a Reality?

Companies have historically pursued cost savings and product differentiation as strategies to gain competitive success.

Aneel Karnani undertook a research in 1984 titled Generic Competitive Strategies—An Analytical Approach and found that a superior cost or differentiation position leads to larger market share and, hence, higher profitability.

 

Novel Business Strategies to Gain Competitive Lead

The quest for competitive strength is not a one-off job, but an ongoing struggle, reinforcing both superior cost and innovation as the heart of  the competitive effort.

The companies’ continuous search for newer ways to gain competitive lead, coupled with fast and ever-changing environmental variables, has led to the evolution of two major business strategies in the contemporary business arena: offshoring innovation and global sourcing.

Inflation spree in the US

One of the major shifts in the economic dynamics of the US economy in recent times is the rise in the rate of inflation – more than the historical average.

In one of our earlier publications titled Is Inflation Adversely Affecting Your Profitability, Trading Economics, which had sourced the US Bureau of Statistics (BLS), was quoted as stating, “Inflation rate in the US averaged 3.24 percent from 1914 until 2021.”

In the same publication, Statista was quoted as stating that the rate of inflation had shown a persistently hiking trend from August 2020 to August 2021, increasing from 1.3 percent in August 2020 to 5.3 percent in August 2021.

The latest statistics published by BLS state that “Over the 12 months from January 2021 to January 2022, the Consumer Price Index for All Urban Consumers (CPI-U) rose 7.5 percent. This is the largest 12-month increase since the 12-month period ending February 1982. Food prices increased 7.0 percent over the past year, while energy prices rose 27.0 percent.”

 

The economic effects of inflation

The inflation spree has led to stressed out supply-chains, increased energy prices and volatility in the labor markets, and the complexity of the situation is compounded by the fact that this inflationary run is simultaneous to major geo-political and social developments at the global level.

 

How the Payroll is Affected?

Society for Human Resource Management quotes the BLS in stating that the recent CPI hike has manifested in the form of real average hourly earnings reducing by 2.7 percent, seasonally adjusted from March 2021—2022, and further quotes Salary.com – compensation data and analytics firm – in stating that around 73 percent of the US firms are considering a payroll budget increase of 4 percent or more owing to the higher salary expectations in the face of rising inflation.

 

Will the inflationary trend persist?

The same publication also quoted BLS in stating that the upward trajectory in inflation is likely to persist because of the increase in Producer Price Index (PPI) since this is the key indicator of the end consumer price.

 

How inflation affects the labor market?

How closely is inflation and labor market interlinked and intertwined can be understood not just from the positive correlation between Consumer Price Index (CPI), Producer Price Index (PP)I and salary hike, but also by the mass resignation witnessed during the COVID-19 pandemic.

 

Labor market and consumer market: ties and knots

According to Chicago Fed Letter, No. 465, February 2022, research has established a strong and positive relationship between resignations and wage and price hike. The research purports labor market slack as a novel measure which has been used to find how the recent sudden surge in propensity to search on the job caused a 1 percentage point rise in inflation.

Is it possible for businesses to save on payroll amid soaring inflation?

Savings and inflation do not go hand in hand, which is why you would barely have ever received an advice on saving during inflation.

But, even though it is insightful that you are least likely to save amid inflation, does it really solve the problem for the businesses: the answer is a big, No! Because, survival is a necessity, not a choice.

 

What is the way out?

So, by now, we all know that a spell of cost-push inflation has gripped the world economy, including that of the United States, the next question is: what is the way out?

This question is not an easy one, but not so difficult at the same time. There is no dearth of literature on inflation, its type and causes, and the monetary and fiscal responses to it, but innovation and evolution, too, have led to development of – what I would refer to as – out-of-the-box solutions.

 

 

The diagnosing kit

In order to deal with this, businesses need to cure the disease rather than the symptom, i.e. rationalize their cost of input in order to retain the shelve price of their products and/or services to competitive levels.

Payroll cost is always a major element in the costing of products and services for any business, ranging generally from 30—50 percent.

 

Rationalizing the payroll cost

This implies that if a business can rationalize its payroll cost, it can rationalize the cost of input, and hence, the price of their end product of service.

At this time, inflation is leaping to unprecedented proportions and retailers and manufacturers are in a tug of war over prices of end products and services with the former refusing to accept but the latter forced into making price hikes.

 

Outsourcing as the surgical instrument

 

I believe that businesses in the US can employ outsourcing, selective outsourcing, and staff augmentation as a surgical mechanism to achieve payroll savings, a trickle-down effect of which would be price stability of end products and services.

Expertise Accelerated as your partner in the savings journey

 

Based in Greenwich, Connecticut, United States, Expertise Accelerated is an outsourcing & co-sourcing/staff augmentation specialist led by C-suite–level US industry experts leveraging a global talent pool to deliver quality-assured–60% payroll savings.

Expertise Accelerated Savings Formula

US Oversight & Quality Assurance x Offshore Resources = Quality Assured—60 Percent Payroll Savings

A word about Haroon Jafree (CPA)

Expertise Accelerated (EA) CEO Haroon Jafree is a Certified Public Accountant. He has delivered phenomenal savings to notable US companies such as the Sabra Hummus, Safford Roads and Hillshire Brands.

EA Outsourcing Methodology

Expertise Accelerated pursues a hybrid work methodology that combines elements of on-site oversight with off-site resource mobilization to club local and offshore expertise to deliver its clients a high-quality yet affordable outsourcing and co-sourcing/staff augmentation service.

 

P: +1 (203) 542-7277
E: hasan@eaccelerated.com
W: www.expertiseaccelerated.com
500 W Putnam Ave Ste 400, Greenwich, CT 06830

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