How to Reduce Your Cost Base Without Losing Sight of Your Strategic Direction?

By Stuart Patch, Operations Director, AcademyGlobal

 

Managing competitive pressures

Organisations continue to face a lot of price pressure as domestic and overseas competitors fight to increase or maintain their market share. The challenge with this is how to be more competitive without destroying the future success of your organisation.

Below I highlight a few key tips to focus on to ensure that you can achieve this.

 

Maintain a strategic focus

One of the most common failings of any cost reduction program is that costs are reduced without maintaining a clear focus on strategy. For a cost reduction program to add value to your business it is essential that it is aligned with your strategic direction.

In the Deloitte “biennial cost survey: cost improvement practices and trends in the Fortune 100” they noted that:

“Businesses today are just as committed to cost reduction as they were in the depths of the global recession. The main difference now is that many are focused on cost- cutting as a way to drive growth, rather than as a way to survive”

For this to be effective it is that any cost reduction activity is aligned with your organisations strategic priorities.

 

Discriminate between what works well and what doesn’t

Another major downfall of cost reduction activities, that I have seen, is when the cost reduction is applied evenly across the organisation without:

  1. Aligning the intent with the strategic priorities and
  2. Identifying areas of the organisation that perform better than others

The reason it is important to carry out these two steps is to make sure that areas that are not of such strategic importance and areas that are not performing so well, bear a larger proportion of the cost reduction activity. This can include an organisations products / services, it’s departments / functions and it’s employees / contractors.

By prioritising the more strategically important areas of the organisation and those that are performing better you can begin to establish a way to improve your results and protect your future growth.

 

Manage the small stuff

Because organisations have been trying to reduce their costs for many years (often focussing on the same areas) finding the ‘low hanging fruit’ or the big wins becomes increasingly difficult.

In his book “Driving down cost – How to manage and cut costs – intelligently”, (Wileman, 2008) talks about the “God of small percentages”. He points out that whilst reducing your unit costs by 1% a year takes a lot of effort if this is 1% better than your competitor is doing after 5 years you have opened up a 5% cost gap.

Maintaining this discipline and continuous improvement approach allows you to gain a competitive advantage. This also aligns with the findings of the above-mentioned Deloitte’s cost survey, which highlighted the top driver for cost management is “to gain competitive advantage”.

 

Communicating and implementing

A common barrier to achieving cost reduction targets is the lack of buy in from staff within the organisations. From my experience, this can often be caused by a lack of understanding of the need for cost reduction and the importance to achieve the strategic objectives.

This same barrier can exist for many organisational activities, whether it be a budgeting process, risk management or quality improvement. To make sure an effective program is implemented and the results are achieved it is important that the strategic objectives are communicated and where necessary staff are educated in the new thinking.

 

Call to Action

Academy Global offer an highly interactive two day program which focuses on strategic cost reduction click here for more information:

References:

Wileman, A 2008, “Driving down cost – How to manage and cut costs – intelligently”, Nicholas Brealey Publishing, United Kingdom.

Deloitte 2013, “Save to grow. Deloitte’s third biennial cost survey: cost- improvement practices and trends in the Fortune 1000”.