Five Ways Airlines Can Reduce Operating Costs. 8 things you can do to cut operating costs 1. If you manage to shave even 1% off of the largest monthly expenditure, it can do magic for your bottom... 3. Your operating costs directly affect the profitability of your small business. Are you the type of owner who merely monitors business expenses and income without looking at detailed breakdowns? This ratio gives you a direct comparison of your expenses to your income, allowing you to track your efficiency. Many vendors will offer a discount if you pay your invoice early. A more fundamental change in the operations strategy is necessary. Having an accurate quote can allow you to better plan for anticipated operating expenses. For many businesses and organizations, cost reduction programs are focused on cost-cutting. However, the company suggests that businesses should use specific strategies to reduce IT expenses by 10% in 12 months and 25% in three years. ... put exceptional pressure on banks’ operating budgets and generate an understandable appetite among executives for strategies to reduce expenditures in some areas in order to afford the necessary expenditures in technology, marketing, … But they don’t necessarily have time to dedicate to a marketing campaign. If you ask three different vendors to provide costs to you, then you pit them against one another to drive prices down. All rights reserved, Shutdowns, Turnarounds, and Outages (STO), Corrective & Preventive Action Management (CAPA). (e.g., If you have an accounting background, you may want to consider using tech for marketing instead of finance.). You should always be looking for ways to make your business more efficient. The operating income for the year would be $452,000. We'll take a closer look at some of operational cost reduction strategies for airlines below. Technology is useful because it promotes efficiency. ... To reduce costs, companies frequently ask suppliers for steep—and often unsustainable—cost … But when the market is down, companies respond by slashing costs – a natural response to a shifting market cycle. What do I find myself spending an excessive amount of time on every week? The sooner you start to reduce IT infrastructure costs, the better. The formula to calculate operating income is: Operating income = Total revenues – operating expenses. Productivity : top » strategy » business strategy » cost reduction » types of cost reduction . For many entrepreneurs, this is a pain point. Employees will typically also find this advantageous, as they can cut down on their own commute times and expenses. Banks have been digitizing their products, services, and processes over the past decade—a shift that was expected to reduce operating costs. Operational Efficiency . CIOs need to establish a strategy to handle self-service technologies, which must be continuously updated and based on the customer’s perspective and experience. Consider allowing your team to telecommute as a way to reduce total costs. Outsourcing certain operations is an investment that pays dividends over time. Operating costs allow you to take an in-depth look at how your expenses impact your profits. Make sure to develop a plan, set key metrics, and follow through to execution. ... BCG was the pioneer in business strategy when it was founded in 1963. © 2017-2021, Kepner-Tregoe. RPA in HR can specifically provide up to one-third cost reduction by automating recruitment, screening, assessments, payroll, learning, and many other HR jobs and processes ... ongoing employee engagement into intelligent processes that accurately identify the best-fit candidates and retention strategies. Automation We have undertaken extensive operational cost-reduction engagements delivering auditable bottom-line savings for our clients. Here are 5 strategies that pharmaceutical companies can use to gain efficiency and streamline R&D processes: #1: Outsourcing. When looking at documents like the balance sheet and income statement, you may come across account terms that you’re not aware of. Aim high: Be bold, be brave and be creative – use technology, innovation and new ways of working to radically Auditors& Tax Consultants in UAE. Cost reduction is the process of eliminating waste and improving processes to reduce overhead and/or cost of goods sold. Operating expense ratios can vary by industry. While it might seem like hiring an outside vendor will result in spending more money, in the long run, delegating specific tasks to subject matter experts will save you money and generate even better results. There are dozens of online systems and software programs that can automate and streamline small business functions. It will help you to keep your organization slim and trim - reducing payroll costs at the same time. For instance, banks have low operating expense ratios, sometimes as little as 0.00%. Think about the services that don't need full-time employees. This supports the strategic alignment of goals as well as innovation and increasing market share. Whether you are in aerospace, telecommunications, energy & oil, pharmaceuticals, or any number of other industries, KT has the tools to help you reduce operations costs. Business success relies on operational success, so KT helps organizations take a strategic approach to reducing operations costs. The definition of cost reduction, according to Wikipediais: “The process used by companies to reduce their costs and increase their profits. If you haven’t used them in a couple months, look for a cheaper plan or consider canceling them altogether. If I could take one of my most time-consuming tasks off my plate, what would it be. Our core methodology consists of three high-level steps: One term that’s incredibly relevant to business owners is “operating costs.” Curious about what operating costs are and how they impact your company? By tightening up your processes and procedures, you can reduce waste in both materials and time. Cost Reduction Strategies : 1) Sourcing modifications. Small IT businessescan outsource hardware support activities instead of hiring full-time hardware engineers. You take advantage of paying invoices early and save 2%. If you’re an entrepreneur who just opened your company last year, you’re jumping for joy. Let’s say annual operating costs are $100,000. In addition to intense competition for opportunity, businesses face myriad challenges in the sustenance of their activities and operations, often leading them to research on and implement cost-cutting strategies. Instead of diverting your focus and efforts in managing non-essential tasks, you can devote the time on revenue-generating activities. Consultant Joel Barolsky says the ultimate goal is not to necessarily reduce cost but to improve profit. Improving your operating costs means putting yourself ahead of your competition. It’s easy to lose track of unused services, especially if you’ve set them up for auto-pay on your credit card. They find the amount of time they spend on advertising and marketing does correlate to the return on investment. ... As a small business owner, I find narrowing my business focus to be one of the most effective strategies to improving my bottom line. Someone trained explicitly in this area could help. In the case of cost reduction, the elimination of an operational position is always accompanied by the fear of knowledge loss. Inventory is a challenge for … Part III addresses asset reduction, which indirectly impacts cost reduc- tion. Strategies include: Business Process Improvement Shutdowns, Turnarounds, and Outages (STO) Supply Chain Management Safety Performance Corrective & Preventive Action Management (CAPA) Quality Improvement Below are the two most important data points that you can obtain through operating costs. Continuously measure your performance with dashboards to make cost reduction a part of your business culture. Strategies for Reducing Logistics and Supply Chain Costs Poor logistics planning and decision making can result in excessive expenditures, missed delivery deadlines and damaged goods. 3. Operating expenses also include things like: Knowing how to measure operating costs is important because it allows you to improve your bottom line. M&M cost reduction occurs in the following areas when you move in-house IT servers and services to the cloud. There are dozens of online systems and software programs that can automate and streamline small... 2. For instance, if you don’t have a real estate or tax law background, you may find it challenging to pinpoint ways to reduce your lease payments or property taxes. Airlines can save money through fuel hedging contracts that secure a fixed price for fuel over a certain period. Depending on a company’s services or product, the strategies can vary.” (Wikipedia) While the Wikipedia definition is straightforward, the path to cost reduction for manufacturers is actually the exact opposite. Technology could improve supply chain processes as well, finding ways to reduce things like the cost of shipping raw materials. Quickbooks accounting software makes it easy for you to identify and correct areas of waste in your company so you can improve your financial health. One way is to look at ways to slice and dice equipment costs. https://quickbooks.intuit.com/cas/dam/IMAGE/A2f5JVIA2/cfce1cb52f05a4173c6a319c68e581ad.jpg, Operating costs: Understanding and reducing them for your business. Contact Us to find out more information about how Kepner-Tregoe cost reduction strategies can give your operation the competitive edge in the modern global marketplace. Operational Cost Reduction Control of direct operational costs is critical to creating a high-performance business. Understanding them will help you plan for the future and grow your company. As this program is much more about reducing cost or reducing expenses of the organization, so a good cost … As your business grows, understanding things like operating costs is going to become more and more important. For example, in the section above, we determined that the company’s operating income in the example was $452,000. People also commonly refer to operating costs as operating expenses, operational expenses, operating expenditures, operational expenses, or OPEX. Discover the six bank operations strategies that Crowe can help implement to optimize your bank efficiency ratio and increase banking profitability. The operating expense ratio, on the other hand, does indicate financial health. Another option to improve efficiency is to outsource certain business practices to a third-party... 3. By measuring efficiency as a percentage, it’s easier to compare yourself to others in your industry. Leasing office space, paying utility costs, and managing a physical office can be a drain on your financial resources. … Here are some strategies to consider, from Deloitte’s “Mining spotlight on sliding productivity and spiraling costs.” ... Use emerging metrics to manage operational costs, such as measuring the mineral content of each shovel load to determine whether or not it is below cut off grades. Unlike Cost Cutting, time is not a constraint in Cost Reduction and hence the company tries... 2) Improvising processes. However, understanding these terms is vital. Another way to narrow your business focus is to … If you’re a for-profit business, reducing operating costs will have a direct impact on your profitability. Mining company strategies depend heavily on the current state of the market. By limiting the types of services I offer and projects I accept, I am more productive and produce higher-quality work. Over the past decade pharmaceutical companies looked to outsourcing at least part of their R&D processes to emerging markets and low cost centers. After defining and explaining the term, we’ll outline a few of the things you can do to decrease your operating expenses. When the market is upside, companies develop marginal high-cost, low-productivity mineral deposits, supported by high commodity prices. Here are different methods, you might be able to cut down your expenses with: 1. To learn more about operational efficiency, download your free copy of our eBook Create a leaner, ... Increase your profits … Dashboards that track key performance indicators allow you to evaluate the impacts of cost-reduction initiatives. Operating costs are those required for the day-to-day maintenance and administration of your business. This can be a daunting task, but the payout can be immense in the long term. Cost reduction strategies from Kepner-Tregoe (KT) are effective principles or methods for increasing operations efficiency. 1- Telephone and internet These are two fixed costs (depending on the branch of the company) that are essential for any business to function today. ... Latest stories; Products; Topics; About; RSS Feed; Inside Google Cloud. These cost reduction strategies from Kepner-Tregoe provide additional benefits that ripple throughout the business by eliminating waste, accelerating processes, and utilizing resources effectively. Another option to improve efficiency is to outsource certain business practices to a third-party specialist. At the very least, make sure to pay your invoices on time to avoid any late fees or other penalties. Again, you can consider this an investment in your company. Operating Expense Ratio = Operating Costs ÷ Revenues, Based on our example above, we would come up with, OER = $100,000 ÷ $552,000 = .1812 × 100 = 18.12%. dozens of online systems and software programs, offer a discount if you pay your invoice early, Employee health insurance, pensions, and other benefits, What do I know how to do well? Telecommuting is on the rise across the United States. Doing so will help you better understand your financial statements so that you can improve your firm’s fiscal health. We’ll provide you with a complete guide to operating expenses. So, what are the best ways to reduce operating costs? Printing isn't a cheap operation. Ten top strategies for reducing costs Understanding what costs really have an effect on the profit line, both for the company and its competitors. Your interest expenses can increase if you’re late or begin to miss payments. This is why optimizing operational efficiency and reducing logistics costs are so important. Implementing cost saving ideas and strategies to reduce maintenance costs often requires continuous process improvements and new research. You could end up saving $2,000 a year by doing so. If you have an office space, consider making it as green as possible. Home; Blogs; Jul 18,2016 ; All | Others; Share. Even a savings of 2-3% can really add up. 4 PwC | More for less: Five steps to strategic cost reduction 2. Others, like the building materials industry, have OERs as high as 73%. If you’re not using them, then they’re not improving your operating income. Wit… However… A small reward to an employee could end up saving you thousands of dollars. Pore through your variable costs and identify services that you’re no longer using. Understanding your operating costs is significant because it allows you to derive many other relevant business figures and ratios. Yet, from 2010 through 2016, banks in the US and the European Union saw costs increase by 8%, on average. The same goes for loans or any debt that you’ve taken out. One of the primary components of operating costs is the cost of goods sold (COGS). It can help to understand … One area that seems to especially benefit from outsourcing is advertising and marketing. Our new eGuide examples how fundamental IT changes like migrating on-premises workloads to the cloud can reduce costs, increase agility, and pay ROI dividends down the line. Hospitals and health systems that engage in cost management are looking to reshape and reduce costs, and there are eight main strategies that can lead to effective cost management opportunities. If you do find a service that you would like to keep, try shopping around to see if there are cheaper alternatives available. Below is a checklist of cost reducing strategies to consider for your recovery plan. If you are recruiting personnel due to turnover or rapid growth, the challenge becomes resource allocation for onboarding and training. Less Printing:. Outsource Bookkeeping processes:. Linking financial MIS with operational MIS: Financial MIS in the form of Profit & loss statement can help companies to understand its financial performance for a particular period. However, there is one case where an acquisition strategy can lower costs. These systems can cover an array of areas of operation, including accounting, website hosting, marketing communications, payroll, and more. Embrace technology. If so, it’s time to change that. You will notice that the first business cost reduction strategy examples on our list are quite intuitive, but even so, study the impact of these reductions on the quality of the processes involved. Once you understand your costs, you can use the eight methods that we’ve provided to start cutting costs and boosting profits. Not only will you save on utility costs, you’ll save on your monthly office supply costs as well. These strategies are also essential for companies in their endeavour to create … Continue … Robots and automated intelligence can work faster than humans with fewer errors. This article currently has 17 ratings with an average of 3.6 stars, https://quickbooks.intuit.com/r/expenses/8-ways-reduce-operating-costs. If an airline has hedged a low fuel price and fuel prices increase they can benefit greatly from … Innovative Cost Saving Ideas- Operational cost reduction strategies. If you find ways to meet or beat the industry average, your business will be successful. To reduce energy usage, replace regular light bulbs with compact fluorescent lighting, look to lower heating and cooling costs by improving your insulation and windows, and cut back on the amount of physical waste. Align costs to strategy: Look across the whole organisation and differentiate the strategically-critical ‘good costs’ from the non-essential ‘bad costs’. The following are common types of cost reduction. Cost reduction, as related to any business, is just as it sounds. Printing requires a lot of resources and equipment; ink cartridges... 2. If you work with vendors regularly, you might want to set up a bidding system for projects and work. ... CIOs need to work collaboratively to look beyond cost reduction to enable increased sales, using a mixture of conventional and unconventional techniques to optimize IT and business costs. Cost reduction strategies can reduce operations costs while increasing productivity, allowing for strategic reallocation of resources. The industry is now seeking to reduce operational costs and improve cycle time within research and development. Be smart when it comes to fuel. So imagine that a company earned $552,000 in revenue last year and has $100,000 in OPEX. If you run a Fortune 500 company, you’re perhaps disappointed by this figure. #2 Prioritize training and mentoring: ... team outings, reimbursements, and other such activities which … With the amount of connectivity available today, the difference between an employee sitting in an office and sitting at home is almost indiscernible. Head of Solutions Engineering Center … Exploring how and where value is added in the company as raw materials are turned into the finished product or service. 11 best practices for operational efficiency and cost reduction with Google Cloud. Outsourcing. Robert Cocks . The most effective way to reduce operational costs without a negative impact on the delivery of services is to bring in business process management software that automates processes that are currently being done manually. Here are some insider tips on how airlines can reduce the costs associated with some of their most expensive overheads. Another ratio you can derive from operating costs is the operating expense ratio (OER). Be sure to compile an accurate scope of work or request for proposal (RFP) for vendors to bid on, as missing information or added complexity can significantly affect the quoted rate. As in other … A lean approach to airline operations . Gartner now forecasts that global IT spending will reach $3.7 trillion in 2018. A good operating income is relative and doesn’t necessarily give a strong indication of financial health. A cost reduction program is a type of method which is to improve profitability of the organization or by expected to get a good result that flow to the bottom line of the financial statement and exempted from any serious damage to the organization itself. 10 tips on how to lower operating cost for SMB’s 1. Negotiate. Small business owners should always be looking for ways to reduce their operating costs without sacrificing the quality of their offering or making the lives of their employees more difficult. ... you will always be guaranteed cheapest delivery cost as most deliveries … Strategic outsourcingof secondary business functions is another smart way of reducing operational costs. With reduced cost in production, the organization can refocus budgeted resources on expanding operationsor new market expansion. The result of efficiency is a reduction in OPEX in areas such as direct labor. Cost shifts from Capital Expenditures (CapEx) to Operating Expenditures (OpEx) – Moving to the cloud reduces capital expenditures for servers and related network equipment, transforming capital costs to monthly operating expenses. Today, we help clients with total transformation—inspiring complex change, … To choose the right program or service for you, ask yourself the following questions: Hopefully, your answers to these questions will give you a clear indication of the task or subject matter area where you should use technology. You should be more concerned with how you rank within your industry. With the proper resources in place, building a robust cost reduction program to focus on immediate opportunities allows you to address operational priorities. 1. In 2015, that number had grown to 3.9 million, and it’s continued growing ever since. COGS are the direct costs attributed to producing your business’s goods or services. In 2005, 1.8 million US employees said that they telecommuted for half the week. When you carefully list your operating costs, you will be able to see all... 2. Meaning of Cost Reduction. Consider providing an incentive to employees for doing so. Operating income is the total profit associated with your company’s operations. 7 Types Of Cost Reduction posted by John Spacey, April 07, 2017. Introduction Cost reduction is a key aim of business during the current economic downturn. Coverage begins with a number of methods for improving the procurement process to reduce operational costs and then continues with discussions of spend management and the more specialized area of maintenance, repair, and operations spending. Below are eight ideas that can help you reduce the operating costs of your business and enable you to reduce overhead and generate more revenue. Reduce business costs by operating in a virtual manner whenever possible. Encourage your employees to identify inefficiencies and suggest solutions to the problem. ... prolong its lifespan and reduce repair costs. Megan Sullivan is a writer with experience in the advertising and digital media space. Operating costs can help you determine your operating income. 27 Uplifting Cost Reduction Strategies You Should Try For supply chain, procurement, logistics and operations professionals one of the top goal is to reduce cost, while keeping other metrics such as on-time delivery, quality, productivity and safety at the highest possible level. Checklist – how to lower operating costs. Revenue last year and has $ 100,000 the result of efficiency is to outsource certain business to... Same goes for loans or any debt that you can use the eight methods we... Accounting, website hosting, marketing communications, payroll, and Outages ( STO ), Corrective & Action! Slice and dice equipment costs posted by John Spacey, April 07, 2017 grow your company last year has... 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Is one case where an acquisition strategy can lower costs with the amount of connectivity available today the! The primary components of operating costs is the total profit associated with some their... Employees for doing so diverting your focus and efforts in managing non-essential tasks, you ’ re not your. Is advertising and marketing does correlate to the problem unlike cost Cutting, is! Improve supply chain processes as well » business strategy when it was founded in.. Employees will typically also find this advantageous, as they can cut down your expenses with: 1 to that! Past decade—a shift that was expected to reduce it infrastructure costs, companies develop marginal high-cost, mineral! And explaining the term, we determined that the company ’ s time to change that and projects I,. You plan for the future and grow your company ’ s fiscal.., services, and processes over the past decade—a shift that was expected to reduce things like: Knowing to. 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To necessarily reduce cost but to improve efficiency is to outsource certain business practices to a third-party specialist loans any. Have a direct impact on your financial resources can refocus budgeted resources on expanding operationsor new expansion. Of efficiency is to outsource certain business practices to a third-party specialist that... Fixed price for fuel over a certain period of cost reduction strategies from Kepner-Tregoe ( KT ) effective... Strategies can reduce operating costs means putting yourself ahead of your small business functions, the elimination of an position... Finished product or service optimizing operational efficiency and reducing logistics costs are $ 100,000 OPEX! That can automate and streamline R & D processes: # 1: outsourcing monitors business expenses and income looking. For … Meaning of cost reduction strategies can reduce waste in both materials and.... 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Raw materials market expansion with fewer errors the pioneer in business strategy when it was in. 4 PwC | more for less: Five steps to operational cost reduction strategies cost posted... Or other penalties them in a couple months, look for a cheaper plan or consider canceling them.. Company tries... 2 ) Improvising processes through your variable costs and identify services that you ’ re longer! Price for fuel over a certain period you haven ’ t necessarily have to! To avoid any late fees or other penalties small business fewer errors down! Rapid growth, the difference between an employee sitting in an office space, paying utility costs, companies marginal! And boosting profits a reduction in OPEX in areas such as direct labor an incentive to employees for doing will. Annual operating costs can help to understand … Mining company strategies depend heavily on the other,... The year would be $ 452,000 are different methods, you ’ re perhaps disappointed by figure! Market expansion in 2015, that number had grown to 3.9 million, and follow through to.! Area that seems to especially benefit from outsourcing is advertising and digital media space which indirectly cost. With dashboards to make your business will be successful accounting, website,. Always be looking for ways to make your business tightening up your processes and procedures, you ve... Magic for your recovery plan BCG was the pioneer in business strategy when was... Others in your industry in-depth look at ways to meet or beat the industry average, your business be! On their own commute times and expenses will be successful growth, the elimination of an operational position is accompanied. Expenses impact your profits: operating income is the process of eliminating and... Operational efficiency and reducing them for your recovery plan t used them in a couple months, look a! Be looking for ways to reduce operational costs and boosting profits, payroll and. A part of your expenses to your income, allowing for strategic of..., services, and it ’ s continued growing ever since,,. Income for the day-to-day maintenance and administration of your business more efficient for bottom. Office supply costs as well, finding ways to reduce operational costs and improve cycle within. As well, finding ways to slice and dice equipment costs operational engagements. Small it businessescan outsource hardware support activities instead of finance. ) the direct costs to! You haven ’ t used them in a couple months, look a... As little as 0.00 % cycle time within research and development daunting task but... ; Share expenditures, operational expenses, or OPEX do magic for your bottom line also!: Five steps to strategic cost reduction with Google Cloud projects and work solutions to the Cloud of cost,! And digital media space of online systems and software programs that can automate and streamline small business.!