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Cost Reduction Wellness Plan: Tools for a future robust cost management strategy

Cost reduction programs are painful. In times of crisis, they often receive priority attention, whilst long-term implications are put on the back burner. Lack of consensus regarding the focus issues i…

Cost reduction programs are painful. In times of crisis, they often receive priority attention, whilst long-term implications are put on the back burner. Lack of consensus regarding the focus issues is common, and if unresolved, results in poor commitment. Cost reduction should be an ongoing process, managed within a long-term strategic framework. Tools are available for providing the necessary future perspectives. They can

address such issues as the focus for future business environments, the future workforce, and future cost environments, all of which are likely to be different from today. These processes acknowledge that short-term cost reduction actions can have long-term business implications — both positive and negative.

Knee-jerk cost reduction imperatives [see image] can have exactly the opposite effect of their intended purpose when employees, customers, and suppliers become demotivated and unrecognized. Most of us have experienced the “no travel” or “spending approval” work-rule edicts. Other painful consequences of an ill-considered cost reduction plan are:

A focus on the tangible and visible [intangible values can become compromised].

A chain reaction on a cost cutting tread-mill [the goal posts keep shifting].

Emotional impacts on those affected [cost cutting usually means downsizing; the “right-sizing” euphemism doesn’t help].

Effects on markets and customers [they often suffer collateral damage].

Traditional cost reduction approaches often fail because:

They focus on a “lowest quartile” strategy on the cost curve, when not everyone can be there.

They lack foresight, leading most often to only transient fixes.

A parochial operational view can overrule people, quality and customer concerns.

They focus on short term fixes without knowledge of compounding effects in the supply or value chains.

A holistic Cost Reduction Wellness Plan takes account of both the current and future Competitive Business Environments. This tool kit is comprised of a structured analysis of key external Trend Impacts [e.g. energy deregulation, environmental regulation, consolidation in supply chains, advances in nanotechnology…], and a Stakeholder Portfolio [e.g. key customers, shareholders, competitors, local communities…]. An internal Cost Driving Factors Portfolio highlights critical success factors that require urgent attention. The key tool for forward looking defines alternative external future Competitive Business Environments — or scenarios — that are specific to the operation or organization. Internal Strategy Options are developed as consistent bundles of strategic elements [e.g. supplier relationships, training and recruiting, maintenance practices, environmental policy…]. Alternate Strategy Options may be focused on one or more of such key issues as people development, process optimization, technology utilization, or partnerships. Strategy Options will also be scalable in terms of impacts. The chosen Strategy Option will be consistent with the possible future Business Scenarios, and be a clearly understood path forward for all internal [and perhaps some external] stakeholders. This will be the Future Robust Cost Management Strategy [see figure].

Why is this important?

Characteristics of a Cost Reduction Wellness Plan:

Helps to bring both internal levers and external cost drivers together.

Distinguishes between controllable and uncontrollable costs.

Takes into account both visible consumables and non-visible factors [e.g. people, reputation…]

Explores both the obvious and not-so-obvious contributors to cost.

Prepares for a continuing process [not a one-time event in a crisis].

Will seek new approaches [strategies] to shift competitive advantage.

Provides a framework for adjusting to the prevailing business environment.

Considers future Competitive Business Environments [scenarios to frame strategy].

Enables different cost management strategies according to alternative business scenarios.

Creates a common language and committed coalition for championing a cost reduction action plan.

For more information on how to introduce a customized Cost Reduction Wellness Plan into your organization, please contact the author. Final word: Keep in touch with the central nervous system and avoid insidious lead poisoning — it leads to a slow creeping death!

Alan R. Procter can be reached at futureviews@alanprocter.com. For more information, visit www.futureviews.net