The Most Popular Cost Management Strategy is Also the Worst

Written by

Davin Wilfrid

Published on

October 23, 2019

This post is excerpted from our new eBook: Rethinking Cost Management in the Digital Age

 

We’ve all heard of cost management strategies going wrong in a very particular way. It typically starts with the CEO or CFO dictating a percentage cut in spending across the board in order to reach a key financial metric. Business unit or division leaders then huddle with their senior managers and decide how to deliver those cuts. 

Spreadsheets are made. Pet projects are guarded. Numbers are fudged. Results are delivered. 

Inevitably, cost cuts made to “hit a number” serve to minimize short-term pain. Business leaders might push back vendor agreements, temporarily reduce consulting spend, implement a hiring freeze, or restructure to reduce FTEs (typically toward the bottom of the org chart).

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And just as inevitably, those costs return once the scrutiny of budget season recedes. And the cycle continues

For Tony Swanson, Managing Partner at AMS Endeavors, the solution to avoiding the cost management hamster wheel is to start by asking a radically honest question: Why? 

“The most important thing is to be as honest as you can about why you’re doing this,” Swanson says. “Is it because some analyst complained about earnings or your CEO is looking to reach a short-term incentive? Or is it because you’ve found a more fundamental dynamic that needs to be addressed — perhaps a new opportunity to grow or a new competitive threat?”

Swanson, who works primarily with industrial companies but has consulted in pharma, biotech, automotive and other industries, says he’s seen several examples of organizations driving cost management strategies based on long-term sustainability. 

When the focus is on sustainable profits, the focus frequently changes from “cost-cutting” to “growth” or out-maneuvering the competition. For example, a company in a regulated industry might at first seek to reduce costs by trimming the global sales force, but opt instead to repurpose the vast stores of compliance-mandated data it has collected as a new product line or value-added service, increasing win rates and profitability per sales rep. 

The execution of your cost management strategy is arguably more important than the strategy itself, says Swanson. Lack of preparation and communication can lead to disaster if the rest of the organization is unclear on the “why.”

“The culture part is the hardest part,” says Swanson. “The executives leading change are almost always smart and capable; it just takes considerable time and energy to hitch your wagons to new horses, and consistent focus to keep it on track. Make sure your rationale is clear and compelling enough to keep the team motivated to head in the right direction.”

rethinking cost management in the digital age cutting and growing at the same time? Image.
Written by

Davin Wilfrid

Published on

October 23, 2019

Davin is the Director of Content Marketing for Catalant. In his spare time, he builds terrible-sounding instruments.