Smart cuts

Eight years into the global financial crisis we are seeing recovery, but it’s patchy and weak – top-line growth is still hard to find, eurozone markets are flat, emerging markets are shaky. In the UK, many labour-intensive businesses are working away at moderating the profit impact of the cost of introducing the living wage over the next five years.

Here are some tips on cutting costs without undermining core values or growth potential.

What constitutes strong leadership?

• A continuous improvement culture, always seeking productivity gains – mainly in small steps, not radical changes.
• Work to short timeframes – what can be achieved in the next month, the next quarter?
• Strong feedback loops to see where progress is being made or not made.
• Expect the need to be persistent, to ask the same question multiple times.
• Continue to challenge and push the top team – the CEO and MDs – on costs, and critically, get HR working with finance on in-house staff cost.
• Businesses should be looking to allow finance to have a greater say in strategic matters – not stay within its technical box – driving the analysis and ideas, and managing cost reduction programmes.

For a big cost cut 10% sounds too easy, and 20% impossible, so 15% seems a reasonable target. When working as a strategy consulting partner, how would I start trying to find these cost savings?

• Understand cost dynamics – what really creates cost, and how do costs move with activities and decisions?
• Build a solid database of costs and headcount – both current and looking back at least five years – with and without consumer price index inflation.
• “Slice and dice” profit and loss statement (P&L) cost lines to find real cost opportunities – for example, “sales and service” cost can be broken down across a matrix of customer value and type of interaction.
• Use best practice benchmarking if possible – if, say, you are a retailer with multiple outlets, or you have a large field salesforce. Make sure you adjust for structural differences (like small vs large stores) before you draw best practice conclusions.
• In a cost-cutting crisis, focus on bang for buck – find the cost opportunities that are material and quickly actionable.

Full-time staff cost is sticky and emotional. Bad hiring decisions can take years and a lot of money to reverse. The living wage is about to add 3-4% pa to wage cost growth for the next five years for those businesses where the majority of staff are on the minimum wage. What to do?

• Minimise the core organisation – only keep in-house those skills and functions that can generate super-returns for the business and push lower-value functions out to suppliers and contractors.
• Slow down hiring decisions and make them more flexible.
• Use rigorous appraisal and ranking systems as the cornerstone of raising productivity, particularly for the solid performers who make up 80% of the workforce – don’t just focus on the 10% stars and 10% advised to take on a different role.
• Don’t allow annual wage creep that lets new competitors operate with lower staff costs.
• If you need to restructure and fire, do it quickly and completely – don’t let it drag out; be fair, but firm. Don’t worry about long-term staff motivation – staff respect organisations that recognise and reward merit.

These are the core procurement principles, distilled:

• Consolidate to fewer suppliers.
• Negotiate intelligently – understand your supplier’s economics and try to find win-wins; don’t push good suppliers out of business.
• Understand and manage total lifecycle cost or total cost of ownership.
• Shine the spotlight on forgotten costs such as travel, maintenance, professional services – any cost where, looking around the table, it’s not clear which senior manager is responsible.

As well as working down the natural cost lines on the P&L…

• Think of the internet as a cost-reduction tool, to cut the cost of interactions – with customers, suppliers, employees and shareholders.
• Consider outsourcing and offshoring back-office functions – and these days, as offshoring matures, even front office and knowledge-intensive research can be outsourced.
• Think how cost can be created and attacked indirectly, eg, by:
• taking less time to do things – such as fashion re-ordering, or annual budgeting;
• increasing quality – spend more upfront to save the cost of fixing later;
• reducing complexity in business processes and in business focus.
• Stop doing things customers don’t value or would prefer to do themselves – eg, think IKEA’s approach to the shopping experience and the trend for consumers to book travel online rather than via travel agents.
• Turn cost into revenue – as Ryanair and easyJet do with menu pricing – or even turn cost functions into new businesses, such as Amazon’s cloud services.

Download pdf article:

• Smart cuts

  Finance and Management Magazine, Issue 240, February 2016

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