This post is an excerpt from our eBook: Rethinking Cost Management in the Digital Age
Strategic cost management demands a new approach from today’s finance and business leaders. Reframing costs as capabilities is a great start, but it also introduces a lot of complexity. Part of the allure of cost management tactics like simple percentage-based spending cuts or zero-based budgeting is the simplicity. There’s a number to hit, and as long as that number shows up on the spreadsheet, the job is done.
Unfortunately, this simplistic focus on a single number or process bears the blame for much of the failure we’ve seen in cost management initiatives. Short-sighted horizons, silos of bureaucracy and information, and incrementalist approaches lead to fragmented half-measures that fail to drive results.
When you start to think of costs as capabilities and focus on lasting value rather than hitting a number, things get a lot more complicated — decisions must be made in a three-dimensional space that accounts for strategy, people, and work.
Fortunately, there are four clearly-defined pillars of strategic cost management to help guide implementation.
- Visibility Into Work
- Empowered Centralized Teams
- Smart Resource Allocation
- Control Over External Spending
Visibility Into Work
Understanding where the money goes is less important than understanding how the work funded by the money impacts the business. Unfortunately most finance leaders — and even business leaders — still see cost as a dollar amount in a spreadsheet cell. Connecting spend to business outcomes typically requires an exhausting track meet of data aggregation, spreadsheet amalgamation, and graphics manipulation.
Providing leaders with greater visibility into work happening across their organization not only helps them to ensure alignment with their short and long-term strategy but also gleans valuable and actionable insights.
Empowered Centralized Teams
Fiefdoms and silos do more than hamper visibility into costs and results, they also bog down necessary cross-functional transformation efforts. Centralized teams — empowered with people, process, technology, and a mandate from senior leadership — are the agents of change organizations need to create holistic models for strategic cost management.
These specialized teams should be empowered to cut across business lines, functions, and geographies, ensuring greater cohesion, sharing of best practices, and efficient deployment of subject matter expertise where and when it’s needed most.
Smart Resource Allocation
If costs are capabilities, then managing the efficient deployment of those capabilities is cost management. Strategic cost management requires finance and business leaders to know what critical projects their employees and contractors are working on and to have the ability to redeploy those resources as results come in or priorities change.
This level of visibility and actionability ensures that discretionary spending is aligned with strategy and that the results of that spending are clear to leadership.
Control Over External Spending
One of the benefits of thinking of costs as capabilities is that it reframes external spending (on contractors, consultants, technology vendors) as part of the broader effort to drive efficiency and growth. At most organizations, external spend is simply a line item on a balance sheet — disconnected from business outcomes.
As the future of work changes, so do the ways finance and business leaders need to manage external spending. Centralizing all vendors — including the firms that you’re already engaged with or have done business with previously — into a single portal boosts the efficiency of procurement and deployment of these resources.
Avoiding the Cost Management Hamster Wheel
Peter Fisher, the founder of Cortus Advisors, has helped organizations in several industries support growth and transformation initiatives. He’s seen several organizations fall victim to the “hamster wheel” of cost management — in which organizations backslide on cost management or focus on short term gains at the expense of market direction.
To avoid the hamster wheel, Fisher suggests several tactics be used during key moments in the strategic cost management planning stage.
- Understanding the true motivation for this initiative
It is vital for business and finance leaders to understand whether their cost management initiatives are driven by current market conditions or future market conditions and whether they are narrowly focused on immediate product competitors or are considering the broader scope of consumer substitutes. For example, an automotive company slashing funding for innovation in order to maintain profitability parity with traditional competitors is ignoring that the competitive landscape now includes ride-sharing business, autonomous cars, and other innovations. Deeply considering these questions in the right context can help companies avoid early missteps.
- Documenting the current state
A thorough accounting of the current state of the organization, including a deep understanding of how the people, processes, and technologies within the organization benefit the customer.
- Optimizing before automating
Automation is a siren song for cost-conscious leaders, but Fisher warns against automating indiscriminately. Many processes should be optimized before they are automated, which adds time to the initiative but may prevent disaster down the line. “A prime example of this is robotic process automation,” says Fisher. “If you automate an inefficient process, your competitors will leapfrog you.”
- Planning for the future
Successful cost management is not a one-time tactic, says Fisher. Instead, leaders need to plan for perpetual cost optimization that reacts to changing conditions and understand the new market structure that will exist when they and competitors improve cost structures. “Organizations need to understand how cost structure changes will influence price competition, economies of scale, and competition with product substitutes. The last step is the actual management of the cost optimization program. You have to have goals and accountability, and it needs to be evergreen.”