The Cost Boomerang - embedding a cost culture 

Robert Bolton, Partner, People & Change, KPMG LLP

"One of the interesting things about the recession that we’ve just gone through is that clients have come to us and asked us “OK, we’ve gone through cost cutting measures but how do we engage employees on being more cost conscious?”  Because the recognise that only when the entire workforce are behind measures to keep the organisation more efficient and more effective is there any chance that keeping a control of costs can be done on a sustained, long term basis.

This encouraged us to do a piece of work to understand what makes for a cost conscious culture.  We’ve developed a survey tool that looks at a number of dimensions of cost consciousness, and through the use of that tool we’ve been able to identify three big issues that all organisations are having to address if they are to achieve a sustained cost consciousness among all employees.

The big three factors that we’ve identified in our research are: Grade Fade; The Knowing-Doing Gap; and The Capability Gap, and I’ll address each of those in turn.

The first one – Grade Fade:

It’s a constant theme in our research that for many organisations the degree to which employees are cost conscious decreases the further down the hierarchy you go.  Ie.. the further away from the top team, the less inclined employees are to be cost conscious, and we call that grade fade.

You might say to yourself that’s understandable surely; it’s only the top team that are likely to be concerned about this.  But we identify that the really well-run organisations, those that really do have a sustainable culture of cost consciousness do not experience grade fade as significantly.

So how to you address grade fade?

Well, we’ve observed that grade fade exists to a much greater extent in those organisations that have too many organisational layers, where you might have middle managers reporting to middle managers reporting to middle managers, for example.  There, you have accountability syndicated to such an extent that people simply don’t feel personally accountable, and that’s where you get this grade fade occurring.  And if middle managers for instance, don’t feel accountability for cost then there isn’t really any chance that frontline employees are going to.  So to address grade fade we think one of the big issues is make sure that the number of organisational levels are ‘as many as simply needed to run the business’, and no more than that.  That is one of the big issues to address grade fade. 

The other things around grade fade are simply making sure that communication works up and down the organisational hierarchy, and that there is ample opportunity for employees to feed their views upwards to the top team, just as much as the top team might be broadcasting their views to all employees.

The second factor that organisations need to take in to account if they want to manage cost consciousness, is what we call the Knowing-Doing gap.  This is where employees do know that cost is an important issue, they know that they have to manage cost and have some responsibility for cost, but actually doing something about cost, taking personal responsibility, being motivated to take action or to raise cost management issues with their managers, and with senior managers, that is another step.  And we call this absence of doing, from actually knowing about it, the Knowing-Doing Gap.

There are things that managers can do, and leaders can do, to help to bridge the Knowing-Doing gap.  Here, this is as much about addressing things like Performance Management, Reward and Recognition, and even going as far as to working out how to ensure that employees genuinely feel they have a stake in the business and that they are effectively owners of the business, in part. 

Of course, a classic example of this would be an organisation like John Lewis where the employees do in fact own the business; they are partners in the business.  That is if you like, a perfect or extreme example of how you might address the knowing-doing gap, but it doesn’t need that kind of governance model to help to bridge the knowing-doing gap.  It can be done simply through ensuring that employees are rewarded and recognised, and have objectives that give them clear legitimacy and a sense of empowerment to address cost management issues.

The third and final area that we regard as significant in managing cost consciousness, and avoiding the cost boomerang, is what we term the Capability Gap.

Our survey tool has clearly identified that employees recognise that they need to do something about cost, and if you’ve bridged the knowing-doing gap that I mentioned earlier, they may feel empowered and actually want to do something about it.  But this third area is actually giving them some of the tools and techniques to do something about it.

We’ve recognised that many employees just don’t feel they understand cost in the organisation for which they work.  They are not given any data about where cost is and how cost can be managed; they’re not given any training or development; tools or techniques.  They’re not given regular feedback as to how the business is performing, how cost is being managed, and what their role is in helping to manage cost at the frontline. So, giving employees the tools, the capability and the training, is the third area that helps to avoid the cost boomerang.

So, in conclusion, avoiding the cost boomerang requires addressing these three things that we’ve identified from our Commercial Engagement Index.  The three things that genuinely affect whether you have a cost conscious culture, or not.

The first thing to address, Grade Fade: the degree to which employees feel concerned about and want to manage cost at all levels of the organisation, not just at the top of the organisation.

The Knowing-Doing gap, the second area: helping employees move from simply knowing that they should be concerned, to actually doing something about it, feeling empowered.

And then the third area, Capability: are we actually training employees, giving them tools, giving them feedback, giving them information, that allows them to understand how cost efficiency and effectiveness can be managed in the business and that they have a part to play.

Those three things together really do create sustainable cost management and avoid the cost boomerang.   It is only through addressing these cultural aspects, these employee engagement aspects that costs will truly stay out of the business."