Less is more: The 2026 guide to reducing operational costs

Calculating operating costs

Before identifying how and where you can trim operational expenses, you must first know how much money is spent on running your business.

To calculate the operating cost of a business, simply add the figures for the Cost of Goods Sold (COGS) and Operating Expenses (OPEX), both of which are derived from an organization’s income statement.

COGS are the direct costs and expenses related to producing a business’s goods and services, which include raw material costs, labor costs and direct factory overheads. Operating expenses are incurred through regular business operations, such as:

• Rent
• Accounting and legal fees
• Utilities
• Bank charges
• Software licensing costs (operating systems, databases)
• Hardware acquisition costs
• Sales and marketing fees
• Employee salaries

These are considered fixed costs, which are recurring expenses that remain constant regardless of business activity. In contrast, variable costs like shipping fees fluctuate based on production volume or demand.

Although operating costs are a necessary part of running a business, enterprises may start to feel the pinch with inflation, industry competition and surging material costs cutting into their bottom line. Regular cost management and monitoring are fundamental to maximizing profitability and ensuring a business’s longevity and success.

Agility is also key, allowing business leaders to swiftly react to market changes with updated pricing strategies or revised production needs to ensure competitive profit margins while capturing market shares.

Strategies for reducing operational costs

Shaving even a small percentage of your total operating costs will work wonders for your bottom line. Here are a few strategies to cut costs throughout your enterprise:

Optimize work processes

Are your employees bogged down by inefficient workflows and manual, back-office processes? If the answer is yes, your business processes are long overdue for an overhaul.

Speak to your employees to identify bottlenecks and pain points as a guiding framework for process improvements, such as supply chain disruptions or ineffective project management steps. This enables you to pinpoint specific areas of concern for strategic redesigns or optimizations to effectively streamline processes and maximize operational efficiency.

However, a successful optimization exercise doesn’t mean that organizations can be complacent after; continuous process improvements are critical for sustained business value creation and cost savings.

Reduce IT operational costs by implementing modern tools

Investing in cutting-edge, industry-relevant technology will pay dividends in the long run. Consider deploying AI-enabled automation tools and cloud-based solutions to automate repetitive, administrative work for faster, more efficient outputs.

Some modern applications may even come with robust capabilities to augment the workforce and empower users to innovate with new business opportunities. Content management is often an area where modernization can offer efficiency benefits and long-term reduction in operational costs. Automated content processes speed up work processes by making it easier to find and use documents, as well as simplifying compliance efforts through features like automated audit trails.

AI agents, for example, can streamline operations by automating complex workflows and minimizing reliance on IT teams for routine tasks. AI agents speed processes while maintaining accountability by involving human operators for critical decisions and reducing costly errors. Plus, ease of scalability further enhances savings, enabling users to handle growing workloads without a corresponding increase in IT expenses.

By digitizing content operations and enabling a paperless work environment, organizations can also forgo the need for physical document storage, cutting down on hefty rent or storage costs.

> Read more: Reducing costs and elevating efficiencies with cloud-enabled content solutions 

Supply chain management

From procurement to distribution, extensive supply chain networks can be a hidden cost center for organizations not keeping tabs on each stage of the cycle. There are plenty of opportunities to lower costs through supply chain optimization:

• Sustainable procurement: Switching to sustainable sourcing practices and having strong ESG credentials can reduce up to 10% in total costs (think energy-efficient infrastructure) while improving business sentiment and value.
  
  
• Inventory management: Storing inventory can be extremely costly, with warehouse rental, taxes and transportation just a few of the expenses involved. Optimize inventory with the goal of achieving the right supply-demand balance, thus minimizing excess stock and reducing running costs in the process.
  
  
• Logistics: Consolidate shipments or invest in technology such as automated container loading systems to reduce costs. Optimizing delivery routes or decentralizing warehousing are also a few other cost-saving alternatives.

Analyze your business expenditure

Pull out your financial statements and make a thorough review of where your cash is flowing out. Consider the expenses-to-revenue ratio, discretionary expenses and even your business capital to identify how and where costs can be further trimmed.

Beware of shadow IT

Shadow IT, which occurs when employees use company IT or cloud resources for personal use, can significantly add to costs and expose your IT infrastructure to malware and cyber threats.

It’s important to understand that employees are engaging in shadow IT to work more efficiently. This means that their current tools for day-to-day work aren’t capable of helping them to get the job done, which happens when companies are utilizing legacy systems that lag behind their more modern counterparts.

Improving profitability: Best practices

Aside from implementing cost-saving measures, businesses should also seek new avenues to improve margins, yielding maximum profit or efficiency at the lowest possible cost.

Employee training and engagement

The trick to higher earnings per share? Having engaged, satisfied employees.

A study by Gallup shows that increased engagement not only leads to a 23% increase in profits, but also improvements in employee performance and productivity. From recognizing and rewarding good work to having consistent upskilling and development opportunities, organizations must show that their employees matter and provide an environment for success.

By harnessing the power of their human capital and investing in employees, organizations can nurture powerful leaders, drive innovation and build a resilient workforce for maximum profitability.

> Read more: 8 ways HR can help increase productivity and profitability 

Adopt energy-saving initiatives

Going green and adopting energy-efficient practices can significantly lower your energy consumption, leading to long-term cost savings. The switch can be as simple as changing your lighting fixtures to energy-saving fluorescent lighting, or migrating from on-prem servers to a cloud-hosted solution instead to save on office space and electricity bills.

Having a strong environmental, social and corporate governance (ESG) position can also create profitable business value. Modern consumers prefer to align with brands with clear sustainable or environmental impact, with 70% willing to pay up to 5% more for green products.

While looking for greener alternatives, organizations can also identify opportunities to reduce waste or cut down on unused services, saving money down the line.

Outsourcing skilled workers

If investing in additional headcount or business software is not an option, outsourcing nonessential functions to independent, specialized contractors can be a great way to get the job done cost-effectively without compromising on output quality.

Consider hiring subject matter experts for tasks like customer support, IT maintenance or marketing campaigns to maximize impact while keeping your organization lean. However, it’s critical to evaluate which processes are best suited for outsourcing to ensure you’re getting the results you want while keeping costs low.

Learn more about adopting a managed services strategy for highly skilled IT work.

Negotiate with vendors

Look at your existing vendor and supplier contracts and ask yourself whether you’re getting the best possible rates for their goods and services. Leverage your long-standing relationship with them to negotiate better prices, lower rates for long-term subscriptions, or earn higher early payment discounts.

Don’t forget to shop around and inquire with their competitors — you may snag a better deal and garner greater savings doing so!

Realizing cost reduction goals: Implementing change

You’ve done the groundwork, reviewed areas of improvement and discussed actionable next steps. Now, it’s time to put your plan into action with these tips:

Create a cost-reduction plan

Realize your cost reduction strategies by developing a comprehensive plan. Having a clear roadmap ensures that you’re engaging with the right stakeholders, setting ambitious yet healthy targets and achieving what you set out to do — achieving long-term, sustainable savings, financial stability and improved efficiency through effective cost-cutting measures.

This approach is not only critical for effective cost management, but also ensures alignment with your overall business objectives for success.

Monitor and adjust costs

Ongoing monitoring of key performance indicators (KPIs) drives accountability and allows organizations to accurately track expenses in real time, identifying potential risks and highlighting opportunities for further cost optimization.

Establish best practices

Take control of your operating costs by establishing best practices or having guardrails in place to ensure effective cost reduction and monitoring. For example, regularly reviewing cost-reduction strategies to accommodate ever-evolving operations or market shifts.