Cost Effectiveness – Surviving and Thriving in the New Economic Order

Organisations across the globe are facing economic conditions not encountered for generations, if ever before. Ensuring that costs are optimised is one of the most important elements in surviving the crisis.

With extreme pressure bearing on the top line, close examination of costs is the only realistic survival strategy for many businesses. This needs to drive far deeper than normal, prudent, "business as usual" cost management. So how do organisations ensure that with limited resources and large cost reduction targets they focus on the right things, execute optimally and come out the other end ready to exploit the inevitable upturn?

Cutting costs is relatively easy...

Cutting costs is relatively easy, but cutting costs effectively to ensure a sustainable and optimal future, is not. History is littered with organisations that ultimately failed not because of the economic or market crisis, but as a direct consequence of their response to it.

Figure 1 shows the questions most frequently asked by executives faced with hitting cost reduction targets quickly, sustainably, with limited resources and without damaging the organisations core fabric for the future.

The foundation in addressing all of these issues and ensuring the right actions are taken is to employ a structured and proven approach to assessment and execution.

The Birchman Group, for instance, underpin our work in cost effectiveness with an approach based on our Value Management ethos, methodology and toolbox shown at a high level in figure 2.

Cost reduction opportunities

Cost reduction opportunities may be categorised as in figure 3.

This categorisation provides a useful high-level checklist in identifying where opportunities may exist. Regardless of the specific opportunity, it is imperative to take a holistic view. Individual initiatives need to be viewed as a portfolio as they will always have an impact on other organisational dimensions including strategy, risk, sustainability, competitive advantage and other initiatives.

Although it may seem obvious, it should always be remembered that the primary objective of any cost reduction programme is to reduce the cost base. In assessing and prioritising opportunities other benefits will undoubtedly be recognised, but if the aim is to reduce costs then any other benefits should be regarded as secondary.

It is important to identify and understand real, hard cost savings as opposed to "paper" savings. In many instances opportunities are assessed and prioritised on different basis and are doomed from the outset, they will not meet or contribute fully towards cost reduction targets. A good example is the case often regarding inventory savings; erroneous assumptions are sometimes made that stock can be sold as opposed to written off, and timescales as to when benefits will actually be realised. Being clear about the difference in cost savings from a cash flow, P&L and balance sheet perspective is crucial.

Scale and timescales

In the ongoing quest to improve competitive advantage, optimising the cost base is one of many dimensions an organisation will consider. The time to fully realise benefits is always important, but it usually will not directly threaten an organisations existence.

When faced with the current financial and economic circumstances, however, survival may well depend upon effective cost reduction action. In this situation, timescales to realise benefits in terms of hard cash flow improvements are of critical importance. In prioritising opportunities, and planning and executing cost effectiveness programmes this is the key criteria. When the alligators are biting it is sometimes difficult to remember that your primary objective is to drain the swamp. In survival mode draining the swamp is still the primary objective, but draining it quickly is of paramount importance!

We recognise that each situation will be different, but as a starting point figure 4 provides some guidance on typical timescales to realise the benefits associated with each of the cost reduction types outlined earlier. The "Time" axis refers to the typical time expected for benefits to be realised, whilst the "Impact" axis indicates the quantum of benefit typically expected.

Cost reduction and benefits management

Benefits management is important in any project or programme. In a cost reduction programme it is critical. In trying to maximise the probability of successfully realising the benefits identified some important aspects to consider include:

• use of a proven methodology and toolset
• rigor in defining the benefits management processes and governance
• clear ownership and accountability for benefits
• identifying benefits clearly and unambiguously early in the programme
• ensuring that everybody is working with a "single source of the truth"
• staying the course with benefits management through to ultimate realisation.

Value management approach to cost reduction

A cost reduction approach rooted in a Value Management framework addresses many of the pitfalls often experienced when aggressively attempting to reduce costs. Quite simply a proven, structured approach of this type ensures that the right opportunities are looked at and improves the chances of success in executing the work. This is true whether considering a broad range of many cost reduction initiatives in a portfolio, or delivering one or few larger initiatives.