The key to cost reduction is targeting resources where they can earn the best return, rather than just cutting costs in itself. The starting point is differentiating the capabilities needed to fuel profitable growth i.e. good costs for targeted investment against the bad costs targeted for overhaul or elimination.
Here we’ll discuss the 5 ways a financial controller can help to structure your company’s cost reduction.
- Start with a strategy:
Before embarking out on structuring a client’s cost reduction, it is important to have a clear view of your strategy and ensure it is consistently understood across the organisation at all levels. The FC will need to present the projection of their strategy, operating model and the risk-adjusted returns from these operations to help highlight how viable this will be in five years’ time. Whilst developing the new strategy projection, the financial controller will need to take into account elements like new technology, changing customer expectations, competition from new entrants and other disruptors.
- Focus on how to cut the cost, not just how much:
Cost reduction projects often lose effectiveness over time because company management kicks off the effort with broad cost reduction targets but then leaves decisions on how to meet those targets to individual line managers. The presumption is that the management have a more detailed understanding of their particular area of the business and will take the right actions to control costs.
While this is true in some instances, FC’s have seen cases where managing to a number has resulted in flawed decisions, such as delaying critical investments, shifting costs from one accounting category to another, or even cutting costs in a way that directly undermines revenue generation. Clearly, the benefits of such cost cuts are likely to be illusory, short lived, and at times damaging to long-term value creation.
- Clearly articulate the link between cost management and strategy:
Strategy must lead cost-cutting efforts, not vice versa. The goal cannot be merely to meet a bottom-line target. Yet many financial controllers do not explicitly link cost reduction initiatives to broader strategic plans. Therefore, reduction targets are set so that each area of the business does its fair share, which can in effect starve high-performing areas of the business and reduce valuable growth investments required for improving poorly performing areas of the business. Furthermore, certain actions in one area of a business can often have unintended negative consequences for the company as a whole.
For example, a global furniture company’s actions to reduce manufacturing and product costs were led at the plant level, without input or customer insights from the sales team. The team in charge of the cost-cutting effort in manufacturing nearly rendered several products defective because they did not know how customers used the products. Consequently, the effort led to the loss of accounts and market share.
- Treat cost management as an ongoing project:
Most companies treat cost management as a one-off project driven by the need to manage short-term profit targets and some of these actions do succeed in the short term because of pressures from senior management figures e.g. CEO or Director. However, abrupt cost-cutting activity typically goes into reverse once the pressure is removed and rarely results in continual changes in cost structure.
An approach that a financial controller may adopt is to use the initial cost reduction as an opportunity to build a competency in cost management rather than in mere cost reduction. Cost-management schedules need to be scoped as two- to three-year initiatives rather than as immediate-term efforts with one-year horizons. Further-more, effective cost-management schedules, by their very nature, include plans for dealing with changing business conditions e.g. business activity-levels and/or competitive drivers.
- Create a culture of cost optimisation:
Strategic cost reduction priorities should be regularly reviewed and updated in the same way as your business assesses the relevance of its strategy and the opportunities ahead. The transformation starts by aligning cost to strategy. It’s important to understand what really adds value in your organisation. You’re likely to find that a large proportion of spending is still being directed towards unnecessary tasks or on activities that can be performed much better, faster and more cost-effectively by doing them in different ways or by passing them on to others.
Want to find out how our team of experienced financial controllers and directors can help to support and structure your company’s cost reduction. Get in touch today or call 01582 516300.