According to the results of a recent KPMG survey of more than 830 top executives around the nation, an almost equal number of respondents believe their CEO’s number one focus is business expansion to improve long-term growth (37%) and reducing overall expenses (34%). What this seemingly contradictory response may be pointing to is an age-old management dilemma – how can a company reduce costs now without hurting its ability to capitalize on opportunities when the economy improves?

 

The answer may lie in how executives approach the issue – instead of looking for the quick fixes that typically don’t result in long-term gains, management needs to take a holistic view of the business to identify areas that could offer process improvement and cost savings opportunities.

 

 

Take a Holistic View to Make Changes Stick

Why Programs Fail

Nine out of 10 cost reduction programs fail to achieve their targets, according to a 2007 KPMG survey of more than 400 companies worldwide. Here are some of the most common pitfalls that companies encounter when looking to cut costs, taken from KPMG’s “Rethinking Cost Structures” whitepaper:

 

n Cost strategies are too cautious – Executives often go after the easy options when looking to save money, rather than the one which will yield the most savings. While budget and headcount reductions provide short term cost savings, reducing complexity and improving process efficiency typically yield more significant and lasting benefits. Companies must also be prepared to adopt major changes to their business model in order to remain competitive.

 

n Cost drivers are not clear – Companies need more insight into what drives costs in their business to ensure that cost cutting is targeted in the right places and that the success of cost management initiatives is properly measured.

 

n Cost discipline is not embedded in the culture – Every person at a company has a role in cost management, but responsibilities are typically unclear in many organizations. Executives should have a clear cost management strategy which must be clearly communicated to employees who understandably can feel threatened by change.

 

A Long-Term View

So how can executives avoid these mistakes? The first step is to think in terms of “cost optimization” rather than “cost cutting.” This means addressing how business is done rather than how money is spent, leading to longer lasting improvements and a greater understanding of the organization.

 

A good analogy is to think of cost optimization in terms of a weight loss program. It’s possible to temporarily lose weight on a crash diet, but in order to maintain the weight lost, one must embrace an ongoing healthy  

lifestyle and diet. Similarly, only executives who take the time to examine the cost structure throughout their business and imbed cost discipline within their organization’s culture will see gains that can be sustained over the long-term.

 

Finance executives need to look at cost structures across whole processes, not just within functions. It means reexamining the company’s business model around lower costs, possibly taking out whole layers of the organization or supply chain, examining customer interfaces and considering outsourcing, shared services and offshoring. The goal should be to create a leaner, more efficient organization, with cost reduction as the consequence, not necessarily the target.

 

It also has to be a team effort. To enact lasting change, management needs to get rid of the silos and help managers take responsibility for changes beyond their own department. Plus, employee rewards around cost incentives must align with the business strategy, since often incentives are not reexamined when the company’s strategy changes.

 

Finally, the IT function needs to be part of the process, right from the start. Companies need to have a clear view of what drives costs in order to make strategic decisions and measure improvements, which makes obtaining and analyzing reliable cost data crucial. Once IT helps identify the issues, the department can frequently play a role in providing solutions.

 

Ready to Meet the Challenge

As the practices above illustrate, undergoing a true cost optimization exercise is not a simple task, and is not one person or department’s responsibility. But due to the evolution of companies’ finance function over the last few years, CFOs are better equipped to work with CEOs and COOs to make the necessary changes.  Now that the CFO’s role has changed from an inward-looking function focused on financial reporting and controls to one focused on improving business performance, CFOs can provide the necessary insight to improve performance, enhance revenue, optimize costs and reduce risks.

 

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