A best practice strategy and approach for cutting costs

With the global economy set for a significant reset while the world grapples with the impact of Covid-19, removing costs has become a top priority for the majority of organisations. Using a best practice strategy and approach for cost cutting positions organisations for long term success. 

According to a new report from PA Consulting, cost cutting can – in a simplified view – be done in two ways. The first is the most common – cutting costs is seen as a short-term reaction to a threat, triggering headcount reductions and the removal of costs as part of ‘business as usual’. But while these quick-fire responses seem a logical response to ensure cash flow and liquidity, they come with a more long-term opportunity cost. 

This short-term approach means that organisations simultaneously reduce their focus on innovation and growth and, in some instances, in the way they are viewed by the customers and communities they serve. The better, but also more comprehensive and time-consuming approach, is to view cost cutting as a strategic exercise. In other words, organisations should accompany much needed quick fixes with a view of the future. This is turn enables leaders to turn cost control into “enhanced and enduring competitiveness.” 

So how can this be achieved? PA Consulting spoke with 180 global senior leaders across 10 sectors about their experiences of and attitudes to cost optimisation, and based on their learnings, the consulting firm identified a best practice approach to designing and delivering cost benefits. The approach put six key dimensions at its core. 

Strategy

First, leaders need a clear overarching strategy. They are advised to develop a comprehensive vision how cost optimisation creates, not just protects, value, and how it will develop in the future. Key is that the strategy aligns to both the organisation’s long-term ambitions and short-term objectives.

In this phase, a number of steps are important. To ensure that costs are factored in to early-stage design and initiation decisions, ensuring any unnecessary costs can be avoided further down the line, leaders should consider using a Design-to-Cost approach for the entire product life cycle (product development, serial production, after-sales) as well as for production investments. 

Then, a detailed plan of product or customer offerings over the next five years – known as a product development roadmap – will enable to prioritise spending on projects and technology capabilities. 

In smaller organisations, the cost strategy can be led and overseen by the executive team, with the COO and CIO in charge of most cost elements. However, in larger firms, cost optimisation needs a dedicated function to calculate product costs and facilitate cost-cutting initiatives, and to influence and gain buy-in from those across the organisation. 

Organisation & Governance

The second step is to establish a governance, which enables to align leaders and people to the same direction of travel. Setting up a cross-functional team is important, and programme leaders should be empowered to deliver change. 

Using cross-functional approach typically includes sales, marketing, product, operations, administrative, IT and supply costs – this paves the way for a highly integrated end-to-end view of all planned and live cost reductions. This then allow leaders to identify how costs flow through the various functions in the organisation, and with setting up plans to deliver cost savings. 

Each member of the cross-functional cost-cutting team needs a clearly defined role and they need to be committed to that role. Every development project should have clearly defined cost targets and progress should be tracked. 

Processes

With a strategy and governance in place, costs savings can be identified at a process level. From PA Consulting’s experience of delivering hundreds of global cost cutting programmes, the easiest way to cut costs are typically found to be in the back-office functions of an organisation, such as finance, human resources or operations. 

Examples include implementing Lean in manufacturing and supply chain, embedding Agile ways of working in software development or implementing digitisation to transform functions. 

Important in this step is to take an end-to-end cost approach for integrated processes, which run through several departments, such as the Procure to Pay or Purchase to Delivery processes. With all process related savings on the table, priorities must be made. Using a total cost optimisation framework, the cost savings that are easiest to realise and those that add the most strategic value should be followed up first.

Tools

To successfully deliver against cost cutting key performance indicators, every organisation needs a web-based toolset for planning, delivering and tracking cost data that allows all stakeholders immediate and comprehensive access to one consistent and reliable set of data. This increases the likelihood of savings delivery, and can trigger a cycle of success – using cost savings to encourage further operational excellence initiatives and innovation.

The most used tools focus on project management, risk management, requirements management and cost tracking.

Competencies & skills

Making sure that people are equipped to deliver the cost savings is an essential part of the change process. According to PA Consulting’s authors, “you’ll need to embed the right culture for cost-cutting success to be sustainable.” 

It starts with a training roadmap for growing operational excellence. During delivery, breaking down silos and implementing agile principles are key steps. “This helps ensure that the organisation as a whole is working to the same strategy with consideration of all six cost-cutting dimensions, rather than different functions pulling different levers at different times.” 

Methodologies

Leaders can use several methodologies to gain deeper insights or speed up the delivery of cost savings. One of the most used methods is benchmarking. This measures how performance compares to other organisations within the sector and against other industries and global best-practice leaders. Using best practice references helps inject new ideas and set the challenging targets needed to stay competitive and grow back margins.

At an operational level, unit-price transparency is a popular methodology. This method spells out the unit cost of processes and products against budget and historic data for every development project, or product. 

Getting it right

Ultimately, PA Consulting’s research emphasizes the need for a holistic approach. “The better an organisation is at all six dimensions, the likelier it is to succeed in its cost optimisation. Equally, falling short in even one area can limit the overall success. Like an engine, cost cutting is a system that needs all component parts working at their best to deliver the optimal results.”