Practical Cost Reduction with Sustainable Results

Profitable growth requires a cost focus which is at times, easily forgotten by the front lines of the business; sales and business development.  Although austerity headlines have waned today, CFO research surveys(1) show that reducing costs is always a key CFO priority.

CFOs we speak to are often alarmed by the realization that gains made by their cost reduction efforts over the course of the last three years have eroded with support costs proving particularly intransigent, and they are looking for solutions to identify where to focus efforts and how to best design and institute sustainable cost reduction.

World-class performers achieve overall back-office cost optimization that enables them to spend 24% less on total back-office costs than their average performing peers. For a typical Global 1000 company this translates to more than $100 million annual savings if it could apply the cost optimization strategies and tactics of world-class performers.(2)

In terms of specific functional areas, world-class organizations have applied cost optimization practices that result in savings of 47% on finance costs, 29% on procurement administration, 22% on human resources administration, and 12% on IT when compared to average-performing companies. (2)

Top industry performers tend to lead with an approach that creates a flexible, variable (lean) cost structure that is sustainable by promoting the following actions:

1.Review the company’s operating model and corporate strategy for fundamental direction

2.Determine cost reduction goals and prioritize service levels to ensure that services both internal and external are delivered to the extent of benefits gained

3.Identify controllable expenses and ruthlessly challenge uncontrollable, fixed expenses

4.Identify, assign, measure/reward end-to-end process ownership

5.Create environment, culture and operating structure to implement change that is actively supported by senior leadership

A Culture of Enduring Cost Reduction

While it is true that you should carefully track cost performance based on hard metrics and benchmarks, the real sustainability and long term gain comes in the form of a transformation of the company’s culture. The front line managers and employees must think and act differently or the gains will not last. And there needs to be an organizational design and incentive to help them in their efforts.

More regular and tired change management efforts will only result in employees getting more anxious. True change will come with an effort that includes and incorporates the most junior employee’s point of view.

Over-archingly, cost reduction is successfully sustained over years by adopting cultural change programs which should include the following  strategies

  • Effective and ongoing communications from senior management extolling the virtues of the program and keeping the realities of business in focus
  • Feedback and action on suggested process changes elicited from employees.  Also, reward the effort!
  • Risk assessment on the top 3-5 expense areas to allow the organization to be more proactive in making necessary changes
  • High-velocity learning loops where changes to processes are elevated and discussed frequently by cross-functional teams in order to get dramatic and quick changes in productivity
  • A forensic review of all contracts and policies conducted to ensure hidden costs, recoverable claims, and cost avoidance areas are highlighted and communicated
  • Rigorous and governed spending instituted in areas that employees suggest are wasteful

Finally, the above actions necessitate a process and operational change plan that is respectfully introduced to and supported by employees.  If process risks are reduced and employees are not penalized for taking ownership of tasks outside their area, a sustainable cost reduction can be experienced by the company.

References:

(1) Duke University / CFO Magazine Global Outlook Survey 2012

(2) The Hackett Group and Standard and Poors 2013

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