When economic conditions are benign, with relatively untroubled growth, companies can often neglect to properly manage their cost base. Although cost management issues never go away, they are easy to ignore during times of economic stability, perhaps only requiring attention when there’s an inclination to trim ‘corporate fat’. Typically, when companies become aware of a growing cost base, they respond by squeezing suppliers. This is regarded as a simple measure, delivering a short-term remedy.
However, this is only one aspect of cost management. Companies also need to consider how well they are geared up for high performance.
- How efficient are they?
- Is further simplification of the business model possible?
- Was the business model correct in the first place?
Your approach to these questions will likely reflect on your company’s performance aspirations. If you prefer to ignore them and focus instead on simply responding to and addressing any instability in your current cost base, then high performance levels may be unattainable.
Many businesses have very modest cost reduction targets ― and fail to meet even those. Where lack of ambition is the problem, a cost management program may only deliver short-term tactical gains. It cannot deliver long-term sustainable improvements. Companies often believe that genuine cost management requires too much investment ― which is difficult to justify when revenues are growing steadily on their own.
The degree of complexity in a business can be a problem. Can the business simplify and streamline? Are key departments empowered to perform or are they tangled in red tape?
Simplification may be welcome in the finance function. By streamlining traditional financial and regulatory processes, costs can be reduced and time freed up for the function to play a more strategic role.
Challenges like these will likely exist across the business. In finding solutions, there may be the need to combine cost cutting with a focus on process optimization, streamlining the supply chain while investing in value-added technologies or R&D.
Simplification is not enough.
- Seek to optimize cost structure. This is not a quick or easy fix. It involves embedding a culture of cost management throughout your business while creating strong incentives for eliminating waste.
- Keep focused on costs, especially during periods when your business is healthiest, as this is when you have the time and space to create sustainable change. Be prepared to adopt bold strategies to retain cost-efficiency.
- Rethink the business model. New models are emerging that suggest five key areas which businesses should keep at the heart of their strategy:
- the need to deploy a coherent vision
- the ability to manage talent
- the ability to accelerate design and innovation
- the capacity to execute change rapidly
- the ability to balance the supply chain properly.
Research shows that very few businesses are able to manage all five of these at the same time but, nevertheless, they should be a starting point for addressing efficiency and cost optimization.
Ambition is the key to cost management and overall performance. If a business is unable to optimize its cost base it may need to think more radically and change the way the business operates in order to unlock value.
Improving performance across the business involves a sometimes radical change of the prevailing mindset. You must move from rationalization to seeking optimization.
This should be at the heart of any business’s strategy.
By giving advice on:
- aiming at driving cost optimization by making strategic changes to the business model
- aiming at optimizing efficiency in systems and controls within finance, procurement, the IT function, treasury and HR
- increasing capacity for high performance through technology, the supply chain and through sourcing and shared services.
