Expense/Cost Management – Brave New World or Back to the Future?

As I was struggling to find a topic, a colleague sent me this article entitled How to Cut Costs More Strategically  (HBR-Paul Leinwand &  Vinay Couto) as a suggestion and what immediately struck me was that it sounded very familiar.  Sure enough, I found an engagement from 1998 where we had applied a number of these concepts (and a lot more).

The article says that many organizations suffer from cost management fatigue and that the reasons for most cost initiatives failing (and most of them do) are that:

• They make across the board cuts – everyone take 15% off their budget
• Cuts are unconnected to their strategy
• Cuts are not sustainable
• They wait to act until they have a problem

They go on to say that successful companies think of cost management as a way to support their strategy and distinguish between good costs and bad costs and shift costs from the latter to the former.  They cite a number of examples including a dramatic one from Frito Lay where they cut $100 million from G&A (bad costs) to invest in their core capabilities of delivery and product innovation (good costs) for a very successful turnaround.  The authors go on to suggest 5 steps:

1. Connect costs to strategy
2. Recast costs in terms of your core capabilities
3. Assign costs to your core capabilities first
4. Make it sustainable by tracking costs and variances
5. Be proactive – don’t wait to do this until you have to

Now here are the examples from our engagement in 1998!!  You will see all the concepts that the authors are talking about above and I’ll take the liberty to point out a few extra bonuses 🙂 .  What you don’t see in the following is that the reason for launching this initiative was that there were a number of critical projects that each Business Unit wanted to launch but they could not find funding for them (good costs) and therefore we came up with a way to cut expenses (bad costs) to fund them.  Below are the actual slides from 1998 and some current comments below each slide.

You will notice a number of the concepts from the article embedded in the above plus a focus on Change Management (bullet 1) which I’m sure the authors meant to include.  Bullet 6 refers to establishing a client-provider relationship between internal service providers and the users.  Bullet 8 is shifting bad costs to good costs.

If you are one of our clients, Principles are a very familiar concept and you also know how powerful they can be.  These and the one below were agreed to at the highest levels – this was a C-level team we were working with.  In addition to a number of Change Management techniques, you will notice the linkage to strategy in the 2nd Principle, the attention to variances in the 3^rd and 4^th.  The declaration of Implications for each Principle ensures that the agreement is genuine, binding and most importantly enforceable – people cannot claim that they did not understand what they were agreeing to 🙂 .

Please notice the change in the approval process for “good costs” in the 2^nd Principle on this slide and the addition of the concept of monitoring – we refer to this a closed loop approval process in our Governance practice.  Requisitioners are required to come back to the approvers to demonstrate that the goals and objectives were met.  The last Principle is also critical and more on that below but Executives must “walk the talk” if they want to make this a sustainable initiative?

Most of these are obvious but please note that it does provide for finding and spending money on “good” costs when they present themselves.  You never want this process to cut ALL costs – just the bad ones.

And this is where the executives “walk the talk” because these actions demonstrate to the rest of the organization that this is being taken seriously and executives expect everyone to take it seriously.  You will see some significant, visible items in the list above and they set the tone for the entire initiative.  I’m happy to report that this was an extremely successful engagement with the CEO and his direct reports and led to many other critical initiatives which we helped lead.  What started out as very negatively perceived by the C level stakeholders turned into an initiative supported and championed by all of them.  If you would like more details, please don’t hesitate to reach out.