January 28, 2021
Strategy Sustainable cost Reduction
Barriers to Strategy Sustainable cost Reduction
• One Size Fits All – Not all costs are equal; organizations indiscriminately tackle “good” costs that support business growth and “bad” costs that don’t directly contribute to business value
• Delivered in Organizational Silos – Targets are set and budget holders left to deliver, without considering the duplication and waste that sit across the organization’s silos
• No Clear Roadmap – Initiatives are fragmented and often overlapping; limited consideration for limited organizational resources or capacity for change
• Lack of Controls – All the effort is put into identifying and executing cost reduction initiatives, but benefits are not realized or costs creep back in over time
• Misaligned Incentives – The reward for success is a smaller budget and new stretch targets. Money taken out is not reinvested and the best performers get another top-down target the following year
• Chasing the Dead Duck – Not knowing when to quit and change direction; all initiatives will not be successful
• Top Quartile Fallacy –Finally feeling you’ve reached the end because you’ve delivered your target; the world is changing fast and what was good yesterday may not be good tomorrow
Success to Strategy Sustainable Cost Reduction
l Build a common baseline
Map and understand your spending and cost structure, identify cost driver, and align the direction
l Align on “good and “bad” cost
Good cost=value added, bad cost=don’t directly contribute business value.
Then overlay different “cost lenses” to identify the key cost areas and target them for efficiency or effectiveness improvement.
² Organizational structure
² Function and cost category benchmarking to compare with your competitors or similar
² Identify the right levers in the right sequence
Armed with a high-level understanding of the “bad” cost areas, establish cross-functional teams to deep dive into priority opportunity areas, evaluate potential cost take-out levers, and validate the size of prize.
The right lever will depend on the cost driver, for example:
Demand Management: Can I reduce demand for activity by challenging the need and reducing customization — for instance, through zero-based budgeting?
Process Improvement: Can I drive greater efficiencies and value from standardization and optimization of effort and activity?
Automation: Can I industrialize or digitize certain processes to save time/cost?
l Centralization: Can non-automated processes be reconfigured to obtain efficiency improvements?
l Strategic Sourcing: Can I transfer some operations to onshore or offshore outsourcers to improve efficiency and flexibility?
l Assign senior leadership accountability
To ensure the longevity of your cost reduction initiative, embed cost ownership and accountability at the leadership and functional levels to baseline budgets and ensure buy-in to targets. Assign cost owners at each management level with senior management taking accountability for delivery.
l Extract “bad” cost with Rigor and Discipline
Accountability and direction are important, but you also need to arm cost owners with tools to examine, challenge, and take action.
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