The xuē reading is the abstract 'reduce / strip away' family and is the one used in most formal compounds: 削减 (to cut down), 削弱 (to weaken), 剥削 (to exploit), 瘦削 (gaunt). For the hands-on 'peel / whittle' sense use the xiāo reading. Taiwan pronounces this reading xuè.
肖 gives the sound xiāo directly, with the secondary reading xiào (resemblance). The 'small / diminished' flavour also sneaks into 削: to pare down or shave off material until something is reduced. Same phonetic in 消 (dissolve) and 销 (melt down).