Effective cost management can be a significant value driver, but it requires leadership from executives committed to investing in the future.
The urgent pressure to reduce costs is undeniable as the recession's impact continues. However, business leaders must remain committed to evolving cost management practices so that limited resources and funds are consistently directed toward the most valuable business outcomes.
This responsibility falls on more than just operational managers, even though they often bear the brunt of executing cost initiatives. Executive leaders develop strategies, foster a culture, and establish processes incorporating a value-realization approach throughout the organization and everyday cost management.
“ Impulsive cost-cutting strategies are not only unsustainable, but they also lack a strategic foundation for long-term success.”
Action No. 1: Clearly define your cost management goals.
Most organizations face pressure to reduce costs, even during “normal” times. The demands from senior leaders to deliver a specific financial outcome often lead to a blanket approach that doesn’t target any particular cost element. This type of directive is prevalent during a crisis, resulting in usually short-term responses that may not be sustainable. Many Management Accountants state, “Impulsive cost-cutting strategies are unsustainable and lack a strategic foundation for long-term success.” Employees may focus on making the most prominent and straightforward cuts, regardless of their overall impact.
Your organization's cost management journey begins with understanding its current state. While short-term cost reductions may be necessary, they can be implemented quickly while considering the associated risks.
Ensure that decisions are made with a comprehensive understanding of their business impact. Avoid making cuts that merely shift expenses to another area, as these are likely to resurface later without providing any real benefits to the organization.
Instead, start by eliminating waste and low-value activities (for example, retiring duplicate or underutilized systems). Rationalize services to eliminate redundancies and renegotiate contracts with suppliers. Cost-reduction efforts are most effective when they target and address the actual cost drivers, preventing these costs from returning to or being transferred to another part of the budget.
Even in emergencies, evaluate the business value against the projected savings. Establish a common language and a structured approach to cost decisions to prioritize specific initiatives and set targets and milestones. Centralize and coordinate this plan by taking personal ownership or assigning a direct report to oversee it. This will reinforce the connection between cost management and business performance. Apply the exact strategies to optimize costs and value once economic pressures ease.
Action No. 2. Ensure that cost management becomes a continuous practice.
The second imperative for executives—one that only leaders can drive—is cultivating a culture and skillset focused on programmatic and structured cost optimization. This will better equip you to consistently reduce and reallocate spending in ways that minimize negative impacts on business value. Benchmarking and identifying which functional or business areas have cost variances significantly higher than peer averages is essential.
The focus of cost optimization is threefold:
a) Improve Efficiency: Strive to enhance all operations by simplifying, standardizing, centralizing, sharing for scale, and automating wherever possible.
b) Increase Productivity: Foster a culture where everyone aims to do more with existing resources. This involves shifting effort and expenditure from lower-value to higher-value work. Make better use of current resources, realign labor, prioritize and reassign projects and spending, and consider outsourcing processes and functions when appropriate.
c) Shift Spending: Assess and adjust resource allocations to maximize the outcomes of your current expenditures. Reduce complexity to simplify processes, systems, and tools; eliminate redundancy and underutilized resources; renegotiate contracts with suppliers; and evaluate how spending reductions impact the organization’s financial performance, customers, and employees.
“Value Management Experts understand that they cannot achieve strategic relevance at the enterprise level simply by cutting costs.”
However, don't stop there.
“Value Management Experts understand that they cannot achieve strategic relevance at the enterprise level simply by cutting cost.”They extend their cost optimization efforts to focus on investing resources to drive business outcomes.
By managing costs more strategically and programmatically, they deliver value to the business — even during economic or business downturns. This type of value realization takes a commitment to:
- Align to value. Engage stakeholders so you can deliver value by meeting their needs and desired outcomes. Get functional leaders to partner with stakeholders to define value, identify and resolve pain points, and realize that the stakeholders own the return part of the return on investment (ROI) analysis.
- Plan and prioritize. Build, validate, and socialize a justifiable business case that builds shared approval for investment priorities. Commit funding first to requests that impact a business outcome or the organization’s mission. Don’t prioritize based on available funds or the urgency of the request.
- Execute and measure. Document the plan, communicate changes, and evaluate value contribution against forecasts. Validate iteratively to check for course corrections and measure impact, but it does not work. Communicate incremental contribution to the objective or mission.
- Iterate and innovate. In an agile approach, actively evaluate progress, reassess stakeholders’ needs, and adapt to changing requirements. Listen and react to customer needs and be nimble and flexible. Be willing and able to terminate projects quickly by eliminating the word “failure” and replacing it with less-fear-inducing terms, such as “learn” and “experiment.”
Action No. 3: Build consensus with business leaders
Experience tells us that enterprises that survive cost pressures do things differently. And again, it’s down to executive leaders to drive this competitive differentiation. Best practitioners:
- Prepare for cost management well before such measures are needed.
- Look beyond the short term and avoid knee-jerk reactions, such as significant layoffs.
- Recognize that cost-cutting is not a growth strategy but one of survival.
- Maintain revenue by taking the opportunity to rethink their products, pricing, or channels.
But you can’t do those things without adequately balancing the complex forces that compete for resources. And you can’t do that without input from your functional and business leaders — to identify critical projects that deliver business value, protect key talent, and distinguish between budgetary line items to cut, reduce, outsource, and defend.
Work with those leaders to:
- Gain a broad perspective. Consider the overall business and strategy beyond the impact on a specific functional group. Ask, for example, about the costs and benefits of reducing headcount.
- Obtain consensus. Cultural and political barriers often impede successful optimization. Ensure stakeholders understand and buy into the process for selecting and prioritizing cost actions and that the approach to cost decisions is consistent.
- Avoid siloed cost reductions. Consider the effects on other functions and business units — and gain cross-functional support for cost-management priorities. Ask, for example, “How can we reduce the total cost of the services we provide our customers?”
- Achieve transparency. Provide more than the traditional, high-level views into budgets so that business stakeholders can see the impact of reduced spending on specific assets and have enough information to, for example, weigh reduced spend on business continuity versus collaboration services.
It would help if you clearly prioritized spending on “run the business” activities during a crisis, but only a strategic enterprise-wide approach to cost management can also preserve funding for the critical projects that deliver business value, protect key talent, and adequately distinguish between budgetary line items to cut, reduce, outsource and defend.
A proactive approach may require an initial investment but can drive future cost reduction and maximize business outcomes. It continually optimizes the use of processes, resources, and existing capacity. This continuous approach makes reallocating scarce funds to the most valuable business outcomes a part of the organization’s identity and culture.
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