Whether you’re the CEO of a multinational or running your own business, you’ve been waiting anxiously for your accountant/s to deliver the end of year verdict…how much did we make? Is it red or black? Is it better/worse than last year?
It was a tough year for Australian businesses. Revenue is in decline and margins are tight.
Cue the cost reduction program! If the ↑above↑ describes your 2014/2015, you’re no doubt shoulder deep in reducing your operating costs.
The bad news is that only 10% of cost reduction programs deliver sustainable results…the other 90% deliver no results, or the results that are achieved vanish within 18 months (Source).
Here’s what we see go wrong, and our advice for getting it right!
Shooting for an unattainable target vs. delivering the key few
A group wide email is sent out – “Give us your cost reduction ideas!! Win an IPad”.
They’re collated in a spreadsheet, back of the envelope value estimates are made, delivery dates are plucked from the proverbial, and accountability is assigned with no consultation. You end up with an impressive cost down number, which will be delivered quickly, with no additional staff!
The management team love it…and want it delivered yesterday…
So out goes the group wide email -“Thanks for your ideas, management loved them, you’re now accountable for delivering them by the estimated due date. We’ll be contacting you for a weekly update on how much you’ve saved!”
Unfortunately that impressive cost down number that you’re now committed to delivering is full of double counting and is built on flimsy assumptions. The true value of the portfolio is about half.
The work to deliver all the ideas would keep your fully utilised team busy for the next 5 years! The delivery dates are unrealistic and need to be doubled.
You’re left trying to deliver a huge number, with a program of ideas that are worth half, in time frames that need to be doubled. This never ends well.
Instead –
- Pick the top 3 quick win cost reduction ideas (see our blog on how to identify these correctly). Use these to get momentum.
- Analyse the top three areas of expenditure in your business.
- Develop one idea that will deliver significant value in each area.
- Validate the value estimates with you finance/accounting team.
- Dedicate all your available resources to delivering these three ideas. Use the validated, high value benefits to justify additional resources if they are required.
Addressing the symptoms vs. addressing the root cause
Cost cutting is simple right…you just remove all the consultants, push planned equipment maintenance out, and ask suppliers for a better rate. You’ve removed costs from the business – and quickly.
Unfortunately all you’ve done is address the symptoms of sketchy cost management practices. You haven’t addressed the root cause of why expenditure was excessive in the first place. Whilst you have achieved some results they won’t be sustainable. Poor cost management practice will continue.
Instead –
- Map out the current processes that are used to approve and control costs in the top three areas of spend in your business.
- Diagnose the root cause/s of why expenditure was allowed to reach excessive levels.
- Ensure the required fixes to improve approval and control processes are part of the scope of the improvement idea.
Cutting from the bottom up vs. vocal & visible leadership
No one likes implementing cost reduction ideas. No one.
We’ve heard every excuse in the book as to why the cost reduction idea is not achievable…”I’m too busy making the business money…we tried this last year and it didn’t work…there’s nothing left to cut in our part of the business, you should focus somewhere else”.
Left on their own, your cost reduction team has to influence and negotiate with these resistant stakeholders. This isn’t an efficient use of their time, nor will it deliver results.
Cost reduction ideas cannot be driven from the bottom up. Vocal & visible leadership is critical to success.
Instead –
- Obtain absolute commitment from the management team to delivering the high value ideas.
- Have management at all levels communicate the high value initiatives to their personnel. Ensure everyone is aware of why the ideas are being implemented and the expectation that they will provide full support.
- Identify and escalate resistance to senior management quickly. Ensure poor behaviour and resistance is addressed straight away. Maintain momentum and drive the ideas through to completion.
About 3 Ps in Profit
Our Vision: Enabling more Australian small & medium businesses to succeed & thrive through genuine partnerships that deliver performance improvement & growth.
Our Mission: Improving & growing Australian small & medium businesses by focusing on the three fundamental elements that drive performance; planning & alignment, processes & systems, and people.
Want to find our more? We would welcome the opportunity to discuss your performance improvement objectives and how we can help you achieve them.