Posted : 2013-10-06 14:23
Updated : 2013-10-06 14:23

Beyond cost cutting

Choi In-hyuk is a partner and managing director of The Boston
Consulting Group.
By Choi In-hyuk

The list of challenges facing corporate leaders today is lengthy. It includes globalization, rapidly shifting market dynamics, fallout from the European debt crisis, and a potential slowdown in Asia. As global economic pressures intensify, corporate leaders must focus on creating a competitive and sustainable cost structure. It is not enough to slash costs through short-term measures such as shuttering facilities, and reducing head count. What is required is true cost excellence in an intelligent and sustainable way in order to protect against another upward creep in costs in the future.

The Boston Consulting Group has a battle-proven approach to help companies achieve a true cost excellence. This approach focuses on improving efficiency and effectiveness of their operations. However, it is not a simple one-size-fits-all tool. Instead, it creates a cost reduction plan that is tailored to fit the culture, structure, and goals of the organization.

Here are six critical steps that can enable companies to deliver significant and lasting cost reductions. These steps, executed consecutively, can be carried out separately for various categories of costs, including personnel and non-personnel costs. In addition, the time frame devoted to each step depends heavily on the level of urgency to reduce costs.

Build consensus and commitment on goals and scope

Ensuring that company leadership and top management are in agreement about the need for change is probably the most crucial point for the success of the whole program. To do this, management needs to outline two factors at the start. First, company leaders should clearly state what they hope to achieve and rank these goals by level of importance. The aim is to ensure that the cost reduction plan addresses these prioritized goals. And then, the scope of the efforts must be clear and spelled out, at least among senior managers.

Once the scope and goals are clear, all managers should be in agreement and provide a steady flow of information about the program's progress.

Consider the recent case of a large Asian bank. It attempted significant cost cutting in the past, but the reductions proved fleeting. For meaningful and lasting cost reduction, the managers took part in an intensive two-day workshop. In that neutral setting, with no distractions, the senior managers spent two days hashing out the financial goals. Throughout both days, there were open discussions about the various possible approaches and consensus had been reached on both the financial targets and the principles of implementation.

Select right methodologies

In order to sort out exactly how cost reduction opportunities will be identified and quantified, companies can select from a number of well-proven methodologies on the basis of the goals and scope of the program.

Pulling together the right group of methodologies is not a simple task. The trick is to tailor that mix of methodologies to meet a company's specific needs and challenges. Two major factors in this determination are the industry sector and the type of expenses.

These methodologies can be used to scrutinize cost and quality levels by tracking certain key performance indicators (KPIs) of core processes and to closely examine the organization's structure. Benchmarking against competitors or against other business units within the company can be a particularly effective way of identifying strengths and weaknesses.

Determine efficiency and effectiveness of organization and set targets for change

With the methodology and tools selected, the in-depth diagnostics start. To identify opportunities for efficiency improvement, management should examine several parameters, including the number of employees reporting to a specific manager, whether there are highly paid individuals at lower levels of the organization, and whether there are too many small teams that could more efficiently be merged into larger teams.

There is also the issue of effectiveness. To understand the effectiveness of a particular department, function, or operational unit, one needs to examine the value that group adds through its work. This examination can be done by asking the customers of that unit, a group we call the recipients, to assess how good that unit is at delivering its product or service. In addition to questioning recipients, this process should include asking the employees of the business unit or function in question about their perception of their own work.

These findings highlight critical deficits in the organization and clear opportunities for improvement to create a comprehensive list of targeted changes.

Develop plan to hit targets

A bottom-up process is the best way to generate ideas about how to deliver the program's quantitative and qualitative goals. As part of this effort, managers and employees further down in the organization outline concrete initiatives and programs that will allow them to hit the set targets.

Defining detailed measures is crucial for successful implementation. Each measure should have a single manager ultimately accountable for its implementation, and a measure should quantify the cost savings to be generated, such as severance, related to any reduction in head count. The measure templates are also the basis for tracking implementation of each initiative with a "no excuses" mentality. If a measure is behind schedule, timely intervention can be triggered. And if one set of initiatives does not deliver the expected savings, new plans should be developed to deliver the agreed-upon targets. Once outlined, these measures, along with an overall plan for implementation, need to be transferred into a company's systems.

Drive implementation of changes

Once the program measures are outlined and have been kicked off, all these measures and milestones should be put together in one comprehensive execution plan so that each one can be tracked over time and steps can be taken to address setbacks, shortfalls in cost savings, and delays.

A central project-management office (PMO) frequently monitors the implementation of the measures.

The role of the PMO is not restricted to tracking implementation and troubleshooting problems. The PMO should take an activist stance, continually looking for new opportunities for cost improvement and challenging the organization to do more, communicating with top management about the program's progress, and providing early insight into the impact that the cost effort is having on the company's financial results.

Make change sustainable

The overall process outlined here certainly goes a long way to prevent backsliding. But there are additional steps that can be taken to make the changes stick and that can be very specific to each company's circumstances. Manufacturing and service units can establish mechanisms for closely tracking certain critical KPIs, and processes can be continually studied for improvement. At the heart of sustainability is the willingness to change any process that allows a reversion to old behaviors. That can be achieved only if the entire organization, from C-level executives to lower-level employees, is behind the program.

The six steps laid out here require investment of time and resources from top management. This process is not a simple one. Rather, it is a sophisticated approach that aims not only to reduce costs but also to transform companies on every level. In the end, this approach will lead to cost excellence and leave a company leaner, more nimble, and fundamentally more competitive.

Choi In-hyuk is a partner and managing director of The Boston Consulting Group.

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