When business objectives call for 10% to 20% cost reduction, the actions executives need to take to reduce costs are strategic, not tactical. Executives need to think beyond common cost strategies and consider focusing their efforts on cost reduction approaches such as rationalizing product lines, reconfiguring their business, reducing organizational complexity, and restructuring operations.
WHY YOU SHOULD KNOW
In these situations, cost-cutting initiatives cannot afford to fail. The consequence can cause a ripple effect that cascades through the entire business. Growth plans get scrapped, innovation projects stop, top talent starts to exit, the company’s competitive position weakens, and larger cost cuts become necessary. Therefore, if your business calls for a massive cost reduction, it pays to know why cost reduction initiatives fail to meet targets.
WHY COST REDUCTION INITIATIVES FAIL TO MEET TARGETS
Cost reduction initiatives fail to meet targets due to poor planning, poor execution, or both. Exhibits 1 and 2 list the most common errors in planning and execution that cause poor cost reduction results.
Exhibit 1. The Most Common Errors in Planning Cost Reduction
- Targeting easily available competitive benchmarks of low significance
- Focus on operational efficiencies, purchasing costs, discretionary expenses, and non-mission-critical perks and activities
- Isolated functional initiatives that lack cross-functional breadth and depth
- Lack of the detailed visibility where best to make strategic cuts
- Lack of insight into the company’s operations to set useful cost reduction targets
- Not taking the time to conduct a bottom-up examination of which costs should be cut
- Poorly connected and reported cost data making difficult to trace drivers of cost
- Across-the-board cuts that don’t differentiate between those that add value or destroy it, and don’t address the true drivers of costs
- Not explicitly linking cost reduction initiatives to broader strategic plans
Exhibit 2. The Most Common Errors in Executing Cost Reduction
- Lack of effective leadership structure to drive the cost structure initiative from the top
- Poor design and tracking of cost reduction initiatives
- Poor coordination across functions and departments
- Accountability assigned at the wrong level
- Lack of understanding of the principles of change management
- Tackling cost items one a t the time incrementally and in short order
- Not allocating the right resources, time, people, and management attention
- Adopting unrealistic cost reduction targets over time
- Poor vertical and horizontal communication (between different hierarchical levels and functions)
IMPROVING YOUR ODDS OF SUCCESS
Because millions of dollars are at stake and failure is not an option, it pays to develop an objective outside view. The approach to strategic cost reduction must be thorough and precise to be effective. Adequate guidance by trained professionals can mean the difference between failure and success in running a cost program.