2/6 │ Paint a powerful picture of why the cost-out is needed

October 15, 2015

2/6 │ Paint a powerful picture of why the cost-out is needed

Ok, so you are looking at how you can cut costs in your company, and you want the process to be as painless as possible and create results. But, you are also in a hurry. Cost cutting may have become a recurring item on the management agenda, but way too often, the preparation of such programmes is highly underestimated, and the consequences can be grave.

In order for the cost-out programme to achieve its goals, it must be carefully planned. It cannot solely rely on the budget process, but needs to be aligned with the company’s strategic direction and consider management capabilities as well as culture.

The ABC of setting the scene for cost-outs

To make your cost cutting programme a success, you should consider three crucial elements.

1. Align the effort with the company’s strategic direction.
To most people, a cost-reduction programme entails a period of uncertainty. Making sure that as many people as possible understand why cutting costs is necessary greatly increases the legitimacy of the process and acceptance of what follows. Therefore, when engaging in cost-outs, all companies should start by painting a picture of the benefits of the programme to the people involved. Whether it is a burning platform, improved competitiveness or new growth ambitions, it is important to make the rationale credible, to quantify the needed cost reduction and to link it to the company’s goal.

2. Be aware of the management strengths of your organisation.
When choosing the right methodology for a cost-out programme, you must have a sober understanding of the organisation’s management capabilities. Culture and competences represent possibilities and barriers, which should be reflected in the design of the cost-out programme. For example, top-down delegation of targets works well in some settings, while in other companies cross-functional collaboration in identifying savings works better.

3. Cost reductions should not only be realised via the budget process.
We often see companies attempt to use the budget process to drive cost reductions. Though this may work well in incremental efficiency improvements, it is rarely effective if the cost reductions are more substantial. Budget processes contain their own logic for bargaining and buffering the numbers, but they rarely get down to activity level, nor do they work well at identifying cost reductions that span across organisational units. Needless to say, it is important that the identified cost savings are ultimately reflected in the respective accounts.

Example: How to fuel growth through cost cutting

A global production company’s growth ambitions were under pressure in the midst of a global downturn and it realised that additional resources were needed in sales to attain its business objectives. The company initiated a cost-out programme to liberate resources to be reinvested in growth. The strategic rationale was thus well established.

In order to reflect the current state of management in the company, the CEO decided to play to the fact that different parts of the organisation championed the growth and cost-issues. The company thus formed two agendas completely separate from each other, with individual governance structures and own project participants. The first programme contained a list of potential investments to boost growth – a very concrete wish list with clear, accountable investment opportunities (many of which already existed as latent ideas in the organisation, but had not surfaced to the management level). The second programme consisted of a list of cost initiatives to liberate resources, essentially a catalogue of savings initiatives. Each initiative had clear descriptions and a logic rationale, clearly defined responsibility and timing, as well as a list of risk concerns or upfront investments needed to realise the initiative. While the two programmes were driven separately, the growth initiatives were directly dependent on generated savings. This enabled management to make an informed trade-off between the two. In the end, both the identified growth and cost initiatives were integrated in the annual budget process.

Now you know the ABC of putting your cost-out into the relevant context. Next, we will focus on how to generate ideas and robust hypotheses for the planned cost reductions. Stay tuned for more next week.

Can’t wait to learn more? Read QVARTZ’ entire Whitepaper on cost-outs. Read the next article in the serial here.

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Contact Christian Sparrevohn by mail or at +45 31933193.