You are in the process of launching a major cost-out programme. A burning platform for change has been established and your hypotheses are well in place. Now, it is time to set up the right process for analysing and substantiating the actual savings. This can be achieved through clear goal-setting, structured planning and an orderly flow of information.
The first step in planning the process of your cost-out efforts is to recognise that the way goals are set and formulated will have an impact on the final results. There are three main approaches:
1. Stretched target goal approach. Top management sets a higher cost-cutting goal than they actually want to implement, resulting in the creation of more solutions to cost cutting and a broad overview of alternatives. Can provide a high degree of motivation to meet targets and promote creative solutions
2. Specific target approach. This approach is based on specifying a percentage by which costs should be cut, for example a savings target of 8%
3. The as-much-as-possible approach. Although this approach seems aggressive, in reality, it often leads to lengthy discussions about how much it is possible to achieve. It requires significant management focus to ensure that the organisation stays on track and remains constructive
In many situations, choosing to set stretched goals strikes a good balance between reaching ambitious results and maintaining the organisational feasibility of the process. It is fairly tangible, typically delivers room for prioritisation and provides the organisation with a chance of feeling accomplishment.
Let your robust hypotheses serve as a structure for the cost-cutting process
The next step is to start planning by letting your hypotheses structure the work. As there should be a limited number of hypotheses, the most efficient is normally to create a work stream for each key hypothesis – for example having one group focus on procurement, while others concentrate on outsourcing, facility management and digitalization, if those are the four areas thought to hold the biggest potential. The content and number of work streams can vary; the key is to make the work streams relevant and manageable. For most large organisations, three to five streams are typically sufficient.
Give the right people the right mandates
At this point, it is also essential to consider the decision-making structure of the programme, including both the steering committee, the middle management and employees. As a minimum, the managers who ultimately need to accept and implement the initiatives should be included in the process.
Manage the flow of information
Finally, it is important to establish how communication should flow, in the project team as well as between the team and the rest of the organisation. As with many other aspects of the cost-reduction programmes, this decision should be in line with the culture of the company. While key milestones should be communicated and progress celebrated, it is important to ensure that the communication regarding the most sensitive processes, typically related to staff reductions, is very carefully managed.
Example: Using stretched targets to create unified goals
A large Danish company needed to identify savings of approx. 30% of its administrative cost base. A large cost-out programme was initiated, and the management decided to use a stretched targets approach to guide the process. The different work streams were instructed to find 40% in savings. The non-negotiable target meant that no time was wasted on discussing what the target should be or whether the 40% was too ambitious. The high target meant that the work streams needed to come up with more unconventional ideas, going beyond what typically would give the first 10-20% in savings. With a shared objective in each workstream, the task at hand was entirely focused on identifying and describing savings initiatives within each area. The entire process took 12 weeks after which each workstream came back with ideas of different savings initiatives to the management. Management could then pick and choose from the range of ideas, leading to differentiated savings across streams. The average savings accepted were at a level of approximately 35%.
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