6/6 │ Cost-out – from blueprint to reality

December 22, 2015

6/6 │ Cost-out – from blueprint to reality

Right. Now, you have finished your analysis, you have established the big picture, you have generated sound hypotheses, you have created a structure for making change happen, and you have decided which activities to take further. When you choose to implement some or all of the ideas generated, it is important to ensure as much alignment as possible with the overall corporate strategy and to be very specific about how to actually realise the identified savings potential. In short, the blueprint defined in the programme needs to be reflected in the reality.

Link the cost-out to the strategic direction of your business

Cost reductions are either independent of or dependent on the corporate strategy. So, you need to consider whether the proposed cost-reduction initiatives are aligned with the corporate strategy; if there is a clear connection to the strategy, the initiative will typically be easier to communicate and understand for the organisation. A renegotiation of purchasing agreements to provide the same input at a reduced price is an example of a strategy-independent initiative. Meanwhile, limiting the amount of products offered to include only the most profitable products is contradictory to wanting to serve as many customer segments as possible. This is a strategy-dependent cost reduction.

Choose the appropriate methodology

There are two primary methods for implementing cost reductions. Which one to choose depends on the scale of cost cutting and the complexity of the project.  Both methods can be applied with success.

The first method is known as “pushing to the line”, meaning that line managers/middle managers are forced to realise the identified savings in the ways that they see fit in order to meet goals. Pushing to the line is usually a budget-driven process and sometimes means that managers decide to realise the savings in ways that are different from what was agreed on in the programme (see the end of article 5).

The second method is to establish a “programme management office” (PMO). Large cross-departmental changes are usually difficult to implement, and this often results in the establishment of a PMO. Being a temporary corporate level function, the PMO has a better overview of the project progress than the individual middle or line managers have and can co-ordinate across units. A PMO would typically support/drive the initiatives where needed and regularly report progress, hurdles and potential realised.

Using a PMO to drive initiatives and support growth

While both methods possess valuable potential, in companies with a track record of projects getting “lost in translation”, pushing to the line can be hazardous. Given the right mandate and configuration, a PMO will often be most effective.

For instance, a large Danish public company launched a new strategy containing both growth and savings targets, it also set up a structure to support the initiatives. A new PMO function was established to help co-ordinate, support and sometimes drive the initiatives. A manager that was well connected and trusted by the BUs was appointed to lead the PMO. Many of the initiatives had cross-functional implications, e.g. procurement initiatives. Therefore, without taking the responsibility for the different cost initiatives from the functions or BUs, top management was able to view the process in its totality and address the issues that unavoidably arose during the implementation process. Also, resources from the PMO were allocated to create clear project charters for each area just as they were included in critical cost initiatives such as administrative reduction initiatives in order to ensure timeliness and success. Along with an integrated budget process, the new function successfully drove reoccurring cost initiatives of more than DKK 400 million while investing in growth initiatives. The PMO lasted during the entire strategic period of three years and was then shut down. Job done.

This was the final episode in the serial about cost-out processes. We have seen that if done right – by setting the relevant context, developing robust hypotheses, planning the process, ensuring tangible initiatives and planning the implementation – cost-out programmes can be not only a survival strategy, but also a way to liberate resources in order to fuel growth.

Just what I needed; I want to read QVARTZ’ entire Whitepaper on cost-outs.

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Contact Christian Sparrevohn by mail or at +45 31933193.