Grow With a Strategic Approach to Costs

Prepare for Expansion with a Strategic Approach to Costs 

by Terry Stidham

Many companies are in better financial shape today than they've been in for a long time. Having implemented cost-cutting and austerity programs during the recession, they have relatively healthy balance sheets and sizable reserves of working capital. They have strengthened their ability to weather downturns and improved their productivity in ways that could potentially last for years. All these restructuring actions were required for survival between 2008 and 2011.
 

But as focus shifts from the cost side of the ledger to the revenue side, searching for ways to move beyond cost cutting — entering new markets, commercializing innovative products and services, offering more compelling customer value propositions —  many companies are not strategically and financially prepared. They have not made the hard choices involved in channeling investments to the capabilities that are needed most, and minimizing or eliminating their other expenses.

3 Question Diagnostic to Tell if Your Company is Ready for Growth? 

1. Do you have clear priorities, focused on strategic growth, that drive your investments?
2. Do your costs line up with those priorities? In other words, do you deploy your resources toward them efficiently and effectively?
3. Is your organization set up to enable you to achieve those priorities?

The easiest way to answer these questions is to imagine the opposite. 
If you do not have clear growth priorities, there are several warning signs. 

• You have so many initiatives that you can’t name them all. 
• Your executives go to multiple meetings on unrelated topics every day. Asked to name the most important capabilities your company has (the things it does well) or how they relate to your strategic objectives, different leaders give different answers. 
• Your best people are working on so many programs and projects, they are burning out. 
• Meanwhile, you are under-investing in some areas — which might include parts of R&D, market development, sales force effectiveness and customer experience — where you could potentially build a distinctive edge against your competitors.

If your costs are not deployed appropriately, that’s also painfully apparent — especially in the amount you spend on non-essentials.  

• Staffing levels in different parts of the organization are out of sync; for instance, you might have twice as many finance people counting the money as salespeople bringing it in. 
• Your highest-priority initiatives falter because their investments do not get sufficient attention, while legacy programs with very little impact continue to be funded. 
• Every function pursues an agenda of professional excellence, striving to be “best in class,” no matter what the cost. 
• Each department’s annual budget is calculated as “last year’s, plus 3 percent.” 
• Every once in a while, in moments of high pressure, you institute across-the-board cost-cutting programs that force the businesses to temporarily reduce overhead, but everyone knows that it won’t make any long-term difference.

If you don't have a well-designed organization, that will become evident.

Multiple layers of management creates a disconnect between top business priorities and the actual work that gets done.

• You are not nimble enough to move quickly, or aligned enough to work in harmony. 
• It takes a week to get a sales quote approved, while your competition wins the business. 
• Information is not readily available to the people who need it. 
• Managers oversee fewer than four employees, on average, and get far too involved in their subordinates’ work. 
• Incentives (such as bonuses and rankings) motivate people in ways that actually undermine the behaviors needed to achieve the company’s stated growth priorities — for instance, people put internal reports ahead of customer responsiveness. 
• You have “shadow” HR, finance, and IT staffs popping up in places outside your shared-services organization. 

Since most suggestions are rejected, people become afraid to take calculated risks — and that derails the most innovative growth- or savings-oriented ideas. 

Increase Flexibility
Taking a balanced, broad-based approach to cost cutting requires business to develop an operating model that is not only cost efficient, but one which can respond quickly to unforeseen changes in the market such as further deterioration or an upward trend. Companies will have no choice but to industrialize their operations in order to combine low costs with high flexibility. Companies should consider outsourcing repetitive, non core functions that do not provide real differentiation to customers.

Build Execution Capabilities

Determining the right changes to make and having the courage to move ahead with these changes in today’s challenging environment certainly will not be easy. However, effective execution is even more difficult. Common challenges in executing cost- reduction strategies include: breaking down silos between business units, changing management culture and attitudes, executing at speed without disrupting business as usual and freeing up sufficient investment capital to tackle structural cost reductions with longer paybacks. Businesses can increase their chances of success by gaining executive buy-in up front, developing clear financial objectives, creating a transparent cost baseline, incorporating cost/benefit reporting into the financial planning process and clearly aligning cost-reduction efforts with existing investment portfolios.

Get Started

Companies that pursued traditional cost-reduction programs achieved cost benefits. In the long run, they will be unable to sustain those cost reductions and will find themselves at a competitive disadvantage.

Maintaining a longer-term focus while undergoing cost-cutting efforts is the right path to take—but it requires discipline, commitment and courage.

The actions companies take now to optimize their cost base and enhance their capacity to respond quickly and effectively to market change will shape their ability to achieve high performance in the future.