Our research shows that leading companies do not arbitrarily cut costs for short-term gain. But rather, they strategically reduce costs to create cash flow that will allow them to reinvest in areas such as mergers and acquisitions, product innovation and market expansion to strengthen their positions. Taking a strategic approach to managing costs that focuses on transparency, shared responsibility and channeling cash savings to drive growth, will help companies succeed as they face current economic challenges.
There are key steps that industrial companies can take to successfully implement strategic cost management and achieve high performance. First, they need to assess the company’s current organizational structure, accounts and systems prior to implementation. They must create transparency by allocating costs in a matrix structure between business functions, such as finance and sales, and costs categories such as travel and fees, as well as establish cost-category owners responsible for expenditures throughout the organization. In this way, clear insight will be provided on who spends how much and on what.
Another step is to charge cost-category owners with establishing standard budgeting and spending policies for all cost categories, and set per-cost targets based on management input. Also, augment management input by creating budgets for each business function.
Companies must analyze budgets in terms of price and consumption costs to identify savings. For example, telephone expenses can be reduced by negotiating the per-minute price of calls, and consumption lessened by diversifying the means of communication.
Finally, they must meet with cost-category owners and budget holders to agree on savings opportunities and a final budget. And, ensure cost targets are met by tracking and addressing budget variances each month.
This process-driven approach will help industrial companies maximize the value from costs, and manage, control and reduce them. It also will enable organizations to assess the impacts, risks and sustainability of potential cost-reduction actions, while identifying those actions that make strategic sense and can be executed. Costs that often hide in redundant activities, manual hand-offs and work duplication that can occur between functions will be revealed too.
Obviously, people are crucial to successfully implementing and sustaining strategic cost management. Beyond the cost-category owners and budget holders, the approach requires that individuals throughout an organization adopt a more cost-conscious or value-centered mindset. In fact, one of the consistent features of high-performance businesses is a value-centered culture that focuses on achieving excellence in those areas that set their businesses apart from competitors.
Such a culture optimizes the value delivered to multiple stakeholders through careful decisions regarding business strategy and resource deployment. It infuses an organization with a strong financial acumen, governance and discipline, so that everyone’s behavior is consistently focused on the common objective of providing sustainable and solid shareholder returns. To cultivate and maintain this culture, senior leadership must also play a key role in encouraging value-centered thinking within their organization.
Choose strength
During difficult times, organizations have two fundamental choices: to hunker down or strengthen their positions. Industrial companies that pursue a strategic cost-management strategy will have an opportunity to accomplish the latter.
Through sustained cost management, they will be able to improve efficiency, margins and cash flow, while maintaining customer service levels and pursuing growth opportunities. Adopting this strategy not only will be crucial to survival against today’s challenges, but will help industrial companies emerge as stronger competitors and industry high performers when conditions improve.
James Robbins, [email protected], is the North American Automotive and Industrial Equipment Industry Lead for Accenture, a global management consulting, technology services and outsourcing company.
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