Cost Reduction Stories

Grow faster than revenue. Don't hire management consultants for the entire year as their charge is three to four times of the human cost. Hiring them make sense only when the consulting assignments are shorter in duration and highly focused requiring consulting skills. The message is - the process of reducing overhead costs on a sustainable basis is more subtle than the most companies think. The short-term margin improvement tactics to fill gap in one-off quarterly earnings may not bring about change as these ambitious cost reduction programs often lose momentum after some time.

Cost-cutting measures that hinder a company's growth objectives will probably be reversed, while those that sharpen its strategic focus and clearly add value are likely to be retained. Companies that truly transform their approach to overhead cost reduction align their cost reduction efforts with their strategic objectives with a strong commitment. Their hiring of consultants is driven accordingly and hence a higher ROI is achieved in all the consulting projects as they meet the strategic objectives.

A pharmaceutical company wanted to reduce its overhead costs by 30 percent and it made its Line Managers accountable for achieving the same. Although the targets were met, the company lost much more in the process. Managers failed to understand the rationale of reducing costs. There was too little analysis of what made costs balloon in the first place. Also, Managers were not given tools and training to help them target and eliminate waste. The net result was fewer people doing more work in the same old way, leading to a vicious circle of declining morale, quality, and productivity. Two years later, costs were on their way back up. Now it is difficult for the company to commit to any cost cut drive in the future.

An entertainment company into exhibition business found that it turns huge amount of data into managerial reports that had little impact on the direction and development of the business. Most companies can find similar waste especially in areas like finance, human resources, and IT.

Companies in the same industry can have sharply different overhead profiles if their strategies are different and thus one should not simply cut cost copying its competitor without a detailed analysis. Take example of two competing food retail chains. One likes to be first in any market and thus pays a premium to its real-estate professionals. The other's strategy is to reduce its market-entry risk by locating stores only where other retailers have already proved successful. It regards its real-estate staff as an important, but mainly a transactional group.

In some cases, capability reviews and organizational restructuring can highlight opportunities to reduce overhead costs. One chemical company reduced the number of staff in its marketing function to 40, from 140. Because the company also sharpened its focus on exactly what it required to drive revenue, however, its overall performance rose rather than fell. This company was aware that without making its employee visualise the underlying goals that are linked to overall corporate strategy, its cost program can deteriorate into a "race for the numbers" and, in the process, lose the support of the workforce.

A leading hospitality company boosted its performance by redesigning its strategic-planning process and business unit plans were reduced to 6 pages, from 70, and the strategic-planning cycle was reduced to six weeks, from four months. Shorter documents generated more dialogue, and a shorter planning cycle produced a strategy more responsive to the market. Planning teams could focus solely on the core elements essential to performance.

A technology company started to close their books quarterly rather than monthly, and a broad range of financial summaries was reshaped, greatly reducing the resources they used. Eliminating reports that were no longer critical to business activities or were duplicated unnecessarily for different parts of the organization offered similar opportunities.

An automotive company found that it had many more staff members employed in support functions than its rivals did. It turned out that a large number were spending a good deal of time fielding questions from the CEO and that each function was building capabilities to meet his expectations. Once the CEO understood the ramifications of his inquisitiveness, he evaluated his requests more carefully, which made it possible to redeploy a number of skilled people. Furthermore, the CEO's willingness to change his own ways sent a strong signal to employees.

The CFO and CEO of one large media company agreed on the magnitude of the change needed but not on how to accomplish it. Their differences ultimately eroded commitment to the program and its sustainability.

Conclusion: To reduce cost on a sustainable basis requires shifting not just how Managers behave but also how they think. It is not about rocket science but streamlining principle of aerodynamics.