August 30, 2005
Volume 1 Issue 25        

A Strategic Approach to Cutting Costs

Martin discusses the concept of SCR or Strategic Costs Reduction.  We will take you through his five point methodology to create a SCR for your company. 

Why is the pressure to lower costs so great?  There may not be an obvious answer, but one of the biggest factors for cost reduction pressure is E-Commerce and the Internet.  Almost everyone is on a level playing field because of the Internet.  Shipping cheaper goods at higher prices is almost a thing of the past.  Being able to hide higher prices through perceived supply shortages is exposed very easily.  The Internet takes “friction” out of today’s business transactions.  Prices can be checked instantly and competition is ready for you to slip. The figure below shows how this friction reduction effects today’s operating margins.  In 1999, these pressures did not even exist because the use of the Internet was not pervasive.

According to Gary Hamel, co-author of the concept of core competencies, “For those companies who have grown fat on friction, inventing new forms of competitive advantage will be no easy task; in our hyper transparent world, competitive advantage will increasingly rest on an ability to create products, services, and business models that are unique and utterly compelling.”  If a company is not continuously reducing costs to reinvest in people, process, and technology it will soon be at a disadvantage to its more fleet-footed competitors.  

BUILDING STRATEGIC COST REDUCTION INTO YOUR ORGANIZATION     

1.  Generate buy-in with key stakeholders. Cost cutting is a reduction of waste. Make sure your employees understand this concept and help achieve that goal. 

2.  Set your objectives. We have talked many times in the past newsletters about ABC (Activity based Costing) and how to set goals for cost reduction. 

3.  Align cost reduction with business strategy. This can be achieved by calibrating the company's vision/objectives with its cash flow and budget, and then determining the financial gap between current capabilities and the future needs of the company. 

4.  Choose your approach. To oversimplify a bit, the approaches can be considered in two types: pervasive and surgical. Let there be no confusion as to the comparative contribution of the two approaches; even the most effective surgical cost cutting exercises can never create the kind of long-term value that is derived from the pervasive approach which infuses cost containment into the DNA of the entire company. 

5.  Set Goals and priorities.  Choose 3 to 5 goals based on cost and efficiency savings versus organizational impact over 1 and 3 years. Make sure each performance target is quantifiable and specific, such as "30% reduction in operating costs from non-strategic units" or "25% reduction in travel expenses”.  Strategic Cost Reduction is something every business should be thinking about; past successes and technology cannot protect companies from shrinking margins and strong competition. 

In closing, we now have a management methodology we can put in place to use some of the cost cutting methods we have learned here at CC4F News, and create an environment in organizations where cost cutting is an everyday occurrence and not an anomaly.

MAKE GOALS AND DRIVE THE COST REDUCTION CULTURE

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