Why do cost reduction programs fail so often

Cost programs can deliver a powerful mix of financial, strategic and organisational benefits. They also fail at a high rate. The causes are specific to each business, but a few themes recur.

Unrealistic targets

Set correctly, a target is an ambitious stretch that pulls a collective effort behind it. Calibration is the whole game. Too modest and the program does not go far enough. Not feasible and the outcome is worse still.

An across-the-board 20 per cent reduction makes little sense if much of the cost base sits under long-term contracts or is structurally inflexible. What follows is a loss of motivation, and the early momentum a program depends on never arrives.

Cuts go too deep

Savings fall into two groups. Quick wins are relatively straightforward and can be delivered fast: travel policy, out-of-contract external spend, low value processes. Efficiency savings come from structural changes to complex processes and take longer.

Target the quick wins, but leave time and attention for the structural work. Without the operating changes underneath, cost reduction becomes headcount reduction with no reduction in workload, which shows up as over-stretched staff and poor customer outcomes.

Execution challenges

The usual roots of execution failure are a lack of alignment between key stakeholders, unclear planning, inadequate tracking of delivery, and a lack of collaboration across functions.

Treat a cost program as the complex transformation it is. That means proper controls: clear targets, a business case and project plan per initiative, and ongoing tracking of each one. Not everything will go to plan, but with the controls in place you can respond while it still matters.

Loss of momentum

After the launch, the first wins tend to come easily. Then the initiatives get harder and progress slows.

Holding momentum takes three things: active leadership from the senior sponsor, preferably the chief executive or finance director; a named senior owner for every initiative; and the processes to manage and track delivery as it happens.

Whilst not everything will go precisely to plan, having these controls in place means you can respond quickly when necessary to get things back on track.