So, you have carefully considered the context for the cost savings efforts, now you need to get more concrete and decide on which method that will be most suited for your cost reduction efforts. Aside from slashing costs evenly across the business, which we do not recommend, we typically see three approaches to cost reductions, which are all valid and widely used.
1. The benchmark approach compares a company’s performance to best practice. This is typically done on quantitative factors such as economic performance, but can also be done on other parameters such as working time efficiency, throughput time, days of inventory, etc. The benchmark approach can be effective in creating a story of burning platform. Nonetheless, benchmarks rarely provide an answer on what actually should be done, and too often, they are used to push the responsibility for finding the right choices down the organisation.
2. The activity value analysis approach entails dividing the entire company or parts of it into units of 50 to 150 employees, which are then subjected to analysis. Within each unit, all activities (and costs) are broken down into end products. The cost is then compared to the value and decisions made whether to change, reduce or even completely remove. While this turn-every-stone approach is thorough, it is also cumbersome and resource-intensive. When there is significant uncertainty as to where the potential lies, it can be the way forward – however, this is rarely the case.
3. The hypothesis-based approach is a very useful approach because it strikes the right balance between efficiency and insight. Instead of an all-encompassing analysis, you set out a number of ideas or hypotheses upfront. Efforts are then concentrated on describing and proving/disproving the ideas while also quantifying the potential. Formulating the hypotheses is also a good opportunity for management to set the direction for the work going forward. In most cases, we find that the hypothesis-based approach is the most effective method for driving real savings potential.
How to formulate powerful hypotheses
First thing to keep in mind when initiating major cost-outs and defining their scope is that often a few initiatives hold the lion’s share of the potential. Make sure that enough time is allocated to go in depth with a few areas rather than spending your energy on investigating too many issues.
Another important point is to make use of available company and market insights to create a set of strong hypotheses. A comprehensive fact book based on existing information is often sufficient to get started. Novelty in a hypothesis is rarely a quality in itself.
Finally, many executives have a tendency to keep the problem-solving process shrouded in secrecy, involving only an exclusive circle of people. While some degree of secrecy may be needed, managers and employees are quick to see what is going on. Involving key stakeholders already during the hypothesis generation phase is often a good idea. Bright ideas often arise within the organisation. However, the willingness to include your employees and middle managers should not overshadow the responsibility of the management in defining the final set of hypotheses.
Testing ideas with employees and gaining buy-in
We have seen many good examples of positive outcomes of involving a broader stakeholder group in the cost-out process. For example, when a large transport company needed to realise savings of 400 million, a crowd of 200 people consisting of the management and middle managers were invited to a management boot camp. To guide this quite diverse group and have some level of crowd control, the hypothesis areas were fairly developed beforehand. This allowed the group to concentrate on concrete ideas within defined areas. Together with a company fact book comprising all existing data, the hypothesis areas and initiatives were openly discussed in groups of eight people. Along with good input on the actual initiatives, the inclusive process provided significant buy-in for the cost savings, while still leaving the final decisions to the executive management.
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Contact Christian Sparrevohn by mail or at +45 31 93 31 93.