Cost cutting, cost reduction, consolidation or cost management have become central planning topics in all competitive markets. An established company in a maturing market is likely to see the best return from investments in cost cutting but this has to be balanced with investments that will grow the top line typically a mixture of selling more to existing clients (market penetration) finding new clients both locally and internationally (market development) and creating new profitable products and services (product development). This mix of strategies has been referred to as the golden circle:
Consolidation improving cash flows which can be used to invest in building profitable sales in existing markets;
More profitable home market sales enabling investment in the existing product/ service mix in new markets;
More profitable sales in home and new markets enabling investment in new products and services which can then be transferred to existing distribution channels.
The temptation is often to look for major, single solutions with the obvious nuclear option of outsourcing, and/or dramatic cuts in personnel. This has surface advantages, but often creates crucial competitive problems.
The main areas of concern are:
The impact on core competence;
The decreased speed of response to market demands; Increased problems of quality control;
Vulnerability to supplier default.
Often companies by attempting to make big changes miss the advantages of applying a continuous cost management discipline.
Continuous cost management as part of planning
A step by step approach will create an environment where cost management is continuously incorporated in company decision making. One such approach is used by Ibis in their planning and monitoring systems for company development:
Establish a planning and monitoring management team;
Use the existing information system to create operational monitoring modules;
Incorporate benchmarks and key performance indicators;
Review objectives against requirements of balanced scorecard;
Identify cost savings and levels of return (consolidation strategies);
Identify returns from market penetration, market development and product development;
Incorporate into cash flow and financial forecasts;
Link into key performance indicators on module by module basis;
Review against balanced scorecard objectives;
Monitor implementation and deal with variances through contingency planning.
This is all incorporated in the Ibis business plan training course which includes the business plan
SOP.
In the early stages of such a programme, the best returns will be from internal cost cutting initiatives indeed some very effective cost cutting ideas have virtually no cost, and very high returns. Once these have been achieved, other initiatives will compete with other options for investment.
As cost cutting programmes often cross traditional organisational boundaries, it often makes sense to allocate specific individuals with the responsibility for identifying and implementing such initiatives. Ibis has found that a rotational responsibility works well within many organisations, and is valuable as part of an overall management development plan (as is new product development, new venture management, personnel management, mergers and acquisitions). This is formalised in a new standard operating procedure labelled SCORE Simplify, Cut, Operational Redundancies and Excesses.
Building a data bank of cost cutting ideas
Each industry will have different cost structures and opportunities, but there are many common ideas that work across sectors and countries. Ibis has identified over 230 alternatives.
Five examples of this long list illustrate the opportunities that companies have to cut costs and reduce the requirement for major surgery.
Voice over Internet Protocol (VOIP). The growing penetration of broadband availability within most organisations, has made VOIP an obvious method for cost management. Companies that have implemented this technology have seen telephone costs dive savings of 40-60% are common especially in those companies with heavy long distance voice traffic.
Open source software. The increasing sophistication of open source software has made this a more and more viable option. Research suggests that IT costs can be significantly reduced by adopting this approach with savings through licence costs, but also through a major reduction in maintenance more than offsetting the higher initial training costs. One survey suggested a 50% reduction in such costs though experience suggests that it is lower in most organisations.
Improving meeting management. Surveys suggest that supervisors and managers spend an average of 10% of their working life in meetings where many spend their time thinking of holidays and leisure. Introducing a SOP to improve meeting management has a dramatic effect on productivity not only at least halving the time spent in meetings, but also making meetings themselves more effective.
Recruitment appraisal. Treating recruitment as an investment appraisal technique can dramatically reduce labour overhead costs. With an average 7% annual staff turnover, enterprises can improve productivity on a step by step basis using this methodology.
Bonus systems. Focusing the bonus system on the overall company objectives defined within the balanced scorecard has been shown to significantly increase long run profitability by focusing bonus payments on real returns.
