I have been involved in several major cost reduction initiatives, adopting a variety of roles. My experience is that very few managers look positively on these projects and will do almost everything they can to avoid them.
The result is that relatively few cost initiatives achieve their goals and deliver sustainably lower costs. Consequently, this means that most organisations only wholeheartedly tackle their cost base during difficult trading periods, increasing the chance that poor decisions are made and that the ‘easy’ rather than the ‘right’ costs are attacked.
So, what should executives be doing instead? What are the ways in which you can increase your chances of effective cost reduction? Here are 12 lessons from my experience of running, supporting and delivering these complex change programmes:
1. Create a sense of mission.
This may seem counter-intuitive, but a real sense of mission is required to engage both senior stakeholders and the wider organisation. At one business, for instance, the CEO spoke sincerely and compellingly about how lower costs and fewer head office managers would enable the organisation to be more flexible, responsive and faster, helping it to make the most of new market opportunities.
2. Strategy should drive cost reduction efforts.
When I worked for Boots the Chemists I was once a project manager on a major cost reduction programme. Unfortunately, the cost programme had no clear link to the strategy. As a result, the costs attacked were somewhat scattered reducing the programme’s impact. We learned our lesson. A few years later, a second cost reduction initiative was integrated with the retailer’s five strategic priorities, helping managers to protect key areas of the business (Beauty, Pharmacy, Healthcare) and, instead, focusing their efforts on less critical activities and categories.
3. Avoid vanilla top-slicing.
The flip-side of a strategic focus is a need to avoid giving each department the same cost targets. A 10% cut for each function may seem simple and straightforward but risks the business attacking the wrong costs. What’s more, many cost reduction opportunities lie in the duplication of tasks across functions, which are not addressed by a top-slicing approach.
4. Develop water-tight top-team alignment, commitment and leadership.
This is a job for the CEO. Without the top-team being fully joined at the hip in their commitment to the cost reduction programme, you have almost zero chance of success. The first task of any cost reduction effort is therefore to create that level of commitment and alignment.
5. Be really clear on the goal.
Your cost goal should be clear, actionable and easily shared across the business. At one client, the company had set a goal of reducing its operating cost base to 30% of sales. This seemed a sensible move, but the goal was a ratio and therefore equally influenced by sales performance as it was by costs. As a result, several members of the executive team argued that they would simply hold costs level or reduce their rate of increase in order to hit the goal, rather than actually reduce costs. The underlying organisational and process issues were not therefore tackled and performance continued to stagnate.
6. Shape the approach, not just the goal.
I recently met with a CFO who was disappointed that the company’s head office reduction goals, which had been used as the starting point of the company’s budgeting process, had not been translated into lower cost budgets. In fact, the budget returns from the head office functions had achieved less than 25% of the CFO’s goal. Sharing a goal is not enough. You must also shape how the goal should be met. For instance, what are the reductions in people you expect to see? Which functions and activities are the priorities for cost reduction? And which business areas should see lower levels of cost and investment?
7. Develop more radical alternatives, as well as ‘sensible’ efficiency improvements.
It is fine to reduce travel budgets, have wider spans of control and reduce the number of management layers. But, if you are trying to create a lasting shift in your cost base, you should also be looking at more radical options. Walmart’s growth in the 1990s, for example, was based on its investment in a state-of-the art supply chain and information systems, together with the high-level involvement of its key suppliers, such as Procter & Gamble. These measures not only helped the company to grow, but Walmart did so with a lean, best-in-class cost base.
8. Establish crystal clear accountabilities.
Cost reduction cannot simply belong to the finance team. Accountabilities for each element of the cost reduction programme should be explicitly stated and understood, with the willingness of each owner to deliver against their goals and objectives.
9. Rigorously track results, review performance and hold teams to account.
Similarly, you cannot expect your goals to be achieved without rigorous management of delivery. Like any complex change initiative, a cost reduction programme should involve clear metrics and milestones that are reviewed regularly by senior executives in a forum where the key business owners are held to account. These sessions can also highlight major issues, barriers and opportunities and should be used to continue to ensure that the benefits of the lower cost base are maximised.
10. It’s hard to over-communicate.
Throughout the process, organisation-wide communication is critical. As I wrote in my book, First & Fast, when Richard Baker told the whole of the Boots head office why and how he intended to reduce the central costs of the business, he received applause at the end of the session. What’s more, Baker’s commitment to communication helped ensure that staff satisfaction actually rose, rather than fell, during the period of the cost reduction programme.
11. Recognise that cost reduction is not just for Christmas.
The danger of any successful cost reduction effort is that it is seen as a one-off. If so, old behaviours will creep back in and, within two or three years, many of the cost successes will have been reversed. Instead, cost reduction and cost management should be seen as a key organisational capability that is continuously developed, so that finance-led cost initiatives are needed far less frequently and so that the business continues to benefit from a lean, agile and flexible organisation.
Each of these lessons can help you to improve your chances of cost management success, but taken together they can transform your results. Which of these 11 actions are currently missing in your organisation and how could they help you to improve the effectiveness of your company’s cost reduction efforts?
© Stuart Cross 2019. All rights reserved.