Challenges in Cutting Business Costs
Although cost reduction programs can deliver a powerful mix of financial, strategic, and organisational benefits, the failure rates of these types of programs are very high.
A recent survey of C-Suite executives, for example, found that while 90% of businesses had attempted to implement a cost reduction program, 75% failed to meet their targets, and 44% missed them by more than half.
Drawing on some of the key insights from our new report, the Agile Cost Advantage, in this article we consider how you can ensure the success of your own cost cutting program.
At Zenith, we have spent over twenty years supporting businesses to deliver cost cutting programs.
In some cases, they have already attempted a cost cutting program, but it didn’t quite get the benefits they were hoping for. In other cases, they have already tried engaging one of our better known competitors, only to be faced with a big bill and a disappointing outcome.
We decided to go back and look at what it was that made some cost reduction programs succeed where others fail.
As we looked at this in more detail, we found that successful programs typically shared a number of features in common.
1. Create a burning platform
Cost reduction programs can be hard. It means changing the way people do things. In some cases, it might mean cutting back on staff.
If you’re going to ask your management team to come with you on this journey, they need a good reason to do it.
That means creating a burning platform so your team understands the need for the cost reduction program.
Sometimes the burning platform might be an existential threat (e.g. your revenue is falling, and if you don’t cut your costs, you won’t be in business).
Sometimes a cost restructuring could be a way of funding new investment, creating new growth opportunities for the workforce.
Whatever the burning platform is, by communicating it clearly at the start of the process, you can bring your teams with you.
They still might not like some of the sacrifices they are being asked to make, but at least they will understand why they are making them.
2. Set a Target
Setting a cost cutting target is critical for the success of the program.
It can help to reinforce the burning platform (e.g. “we’ve got to cut our costs by 20% to stay competitive”). It also defines the expectation for the program from the outset.
If your teams know what they are aiming for, it will help focus them on ways to achieve the target.
At the same time, a bad target can be worse than having no target at all. If the target is arbitrary and unrealistic, people will dis-engage with the process, knowing it will end in failure anyway.
A good target should be a stretch, but feasible for the business to achieve. In setting a target, you should conduct a high level assessment of your cost structure.
Benchmarking of key categories can help you assess just how much of a reduction is realistic in each area. By investing a small amount of time up-front, you can set a challenging target that sets the foundation for a successful cost reduction program.
3. Identify cost cutting ideas as a team
Once companies decide to embark on a cost cutting program, they sometimes make the mistake of not involving their own teams in identifying cost cutting ideas.
Either it is run direct from the Finance team, or external consultants are brought to develop the plan.
Not involving your broader executive team at the ideas generation stage is a mistake. After all, your own people know the business better than anyone else, and will have their own ideas on what could be improved.
Cost reduction programs are about the combined impact of lots of inidividual good ideas.
It’s therefore important to get as many ideas on the table as possible at the start.
Involving as many people as you can at the ideas formulation stage is one way to achieve this.
In addition, involving people helps to get them on board with the program.
4. Build early momentum
Getting some early runs on the scoreboard can be very powerful in building early momentum for the cost reduction program.
Seeing some initial financial benefits flowing through is a powerful vindication of the process, and motivates your team to go after the next cost cutting opportunity.
Generating some initial savings also makes it easier to fund some temporary resources or investment that might be needed to unlock further savings.
Having compiled a list of potential cost saving ideas, you should then prioritise these ideas on the basis of potential value and speed to impact.
Those cost initiatives that offer the best potential for early impact should be fast-tracked for immediate action.
5. Develop a clear project plan
One of the main causes of failure for cost cutting programs is the failure to follow through from the initial idea generation to a clear execution plan.
Without a clear plan or defined timeframe, at best the timing for the financial benefits will slip, and at worse it will end up at the bottom of a long to-do list as day-to-day priorities take precedence.
Developing a clear project plan for each cost initiative is a critical step in building the necessary accountability for the cost reduction program.
By clearly setting out the key milestones and timing for the delivery of benefits, it forces everyone in the team to think carefully about the practicalities of the idea.
It also surfaces any issues with access to resources at the start of the process, ensuring that any necessary trade-offs are made and the program is set up for success.
6. Develop a forecast model for the expected cost savings
As part of the planning process, it is important to estimate the potential financial benefit of each cost initiative, as well as the expected timing for the delivery of these benefits.
This is a critical component of the overall cost reduction plan for two reasons.
First, by estimating the likely savings from each individual cost initiative, you can then total these up across all initiatives to get an estimate of the total value of the program.
This will tell you how close you are to the overall targets you set at the outset.
From this you then know whether you need to go harder, or whether you have some flexibility should some initiatives not meet expectations.
The second reason for developing an estimated profile of savings for each initiative is to help with the tracking.
You will be able to compare the actual level of savings with what was expected, helping to identify shortfalls early on in the process before they compound into a major problem over time.
7. Track the progress of your cost reduction program
We ensure that every individual cost initiative is added to an overall program management and tracking tool.
This keeps track of when key milestones are due, and monitors the ongoing delivery of financial benefits.
We set up regular tracking meetings, to monitor the overall status of the cost reduction program.
By putting in place these tracking disciplines, we are able to get early visibility when things are falling off track.
This means we can take action early to get it back on track, or cut our losses and re-prioritise resources if it is clear that the initiative is unlikely to succeed.
8. Refine and adapt as you go along
Not everything goes to plan – not every cost reduction idea turns out to be realistic in practice.
The key to a successful cost reduction program is how well you respond to these unanticipated eventualities, and how well you adapt your plans as the need arises.
By having a good understanding of the broader picture of the performance of the program in aggregate, you give yourself the best position to determine how best to adapt the program to the change in circumstances.
It may be that you’re tracking sufficiently well in other areas that you can afford to write off a particular cost initiative.
In other cases, you might be faced with a potential shortfall that will need new cost initiatives to fill.
Either way, you need to be flexible and ready to adapt the program to changes in circumstances to maintain alignment with the overall objectives.
9. Celebrate success
Let’s face it, cost reduction programs don’t exactly have a reputation for being a fun and rewarding thing to be associated with.
At the same time, for a cost reduction program to be successful, you need everyone on board.
It is a collective process, from the initial generation of ideas, to the work to drive home the individual savings associated with each cost initiative.
Calling out early wins can help to build momentum for the broader program.
Each celebration is an important step along the transformation journey, marking key milestones in the delivery of the program.
10. Learn and improve for next time
Cost reduction programs are similar to major business transformation programs.
They involve multiple functions and changes to the way things are done.
Being good at cost reduction, and business transformation more broadly, is a good capability for a business to have.
It therefore makes sense to take every opportunity to review your cost reduction program, work out what is working well, and where you as an organisation need to focus further.
At the end of the cost program (or at the end of a key phase if it is a complex one), we therefore typically conduct a review process with participants.
Where changes are needed, this will ensure you are in a good position for the next complex transformation you need to undertake.
