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Beyond cost cutting

Six steps to achieve competitive advantage through cost excellence

STR Team 

In India, companies are facing top-line pressure for the first time in a long while, and simultaneously, demand stagnation is leading to plunging profitability, forcing companies to explore multiple avenues to reduce costs.

In these turbulent times it is more critical than ever that companies address fundamental and structural aspects of the business to reduce cost sustainably. At the same time, such changes can give them a competitive advantage and position them for the future when the economy turns a corner.

It is typically not enough to slash costs through short-term measures such as squeezing suppliers, shuttering facilities, and reducing head count. What is required is a move away from endless rounds of cost reduction and toward true cost excellence. The effort presented here centres on reducing costs in an intelligent and sustainable way. These improvements help companies become more agile and less vulnerable to the impact of unfavourable economic forces - a fact that is not lost on investors. An exhaustive analysis by The Boston Consulting Group across numerous industries including, for example, the medical device and equipment industry, consistently found this inverse relationship to be true.

Six steps to deliver cost excellence

Step 1: Build consensus and commitment on scope and goals. Ensuring that company leadership and top are in agreement about the commitment to change is probably the most crucial point for the success of the whole programme. To do this, needs to outline two factors at the start: the overall goals and the scope of the programme. Once the scope and the goals are clear, must decide when and how employees will be involved in and informed about the programme - and how their participation will evolve over time. In addition, a compelling message as to why the effort is critical for the future success of the business must be crafted and communicated to employees, unions, and other employee representatives as well as to investors, suppliers, and customers.

Step 2: Select the right methodologies. In order to sort out exactly how cost reduction opportunities will be identified and quantified, companies can select from a number of well proven methodologies based on the goals and scope of the programme. (See box)

The trick is to tailor that mix of methodologies to meet a company's specific needs and challenges. Two major factors in this determination are the industry sector and the type of expenses that are on the table. The company's culture, the urgency with which cost savings needs to be achieved, and the way in which management wants to drive change - through a centralised or decentralised effort, for example - will also lead to the selection of the right methodologies.

These methodologies can be used to scrutinise cost and quality levels by tracking certain KPIs of core processes and to closely examine the organisation's structure.

Step 3: Determine how efficient and effective the organisation is and set targets for change. With the methodology and tools selected, the in-depth diagnostics start. Take the case of personnel costs. One of the most common methodologies for analysing personnel costs is 'activity-based optimisation.' This involves studying what tasks people actually do in their jobs, a process that gives insights into the efficiency and the distribution of work in an organisation. This analysis can be done in a matter of days for the whole business, including both support and operational functions. These results can then be benchmarked against those of competitors, comparing, for example, what percentage of the total workforce is allocated to each function. This is a very powerful way to get an objective view on efficiency.

To understand the effectiveness of a particular department, function, or operational unit, one needs to examine the value that group is adding through its work. This examination can typically be done by asking the customers of that unit, a group we call the recipients, to assess how good that unit is at delivering its product or service. This largely qualitative information is often supplemented by an examination of "functional KPIs" and the benchmarking of those indicators against competitors and comparable companies.

Step 4: Develop a plan to hit the targets. A bottom-up process is the best way to generate ideas about how to deliver the programme's quantitative and qualitative goals. As part of this effort, managers and employees further down in the organisation outline concrete initiatives and programmes that will allow them to hit the set targets. Sometimes, however, people within the organisation believe the targets are not achievable. In that case, they need to prove why they cannot hit that goal and outline what level of savings they can actually deliver.

Creating concrete initiatives to hit the targets is often best achieved through a series of workshops during which managers and employees work out the details. When a process involves several divisions or functions, valuable instruments include value stream mapping, a technique used to analyse and design the flow of materials or information across multiple groups, and kaizen workshops, which involve employees from all affected divisions and functions. Defining detailed measures is crucial for successful implementation. Pre-defined measure templates are typically used to detail the plans.

These templates should capture all the critical information with each measure having a single manager, or 'owner,' who is ultimately accountable for the implementation. Measures should quantify the cost savings to be generated, the impact on cash flow, and the costs, such as severance, related to any reduction in head count as well as detail any investments that may be necessary to accomplish the change.

Step 5: Drive implementation of the changes. Once the programme measures are outlined and kicked off, it is critical to keep the organisation focused on completing these discrete components of the plan. All measures and milestones should be put together in one comprehensive execution plan so that each one can be tracked over time and steps can be taken to address setbacks, shortfalls in cost savings and delays.

A central project management office frequently monitors the implementation of the measures. This ensures that there is one central group that has the right tools to keep the effort on track and a process for correcting problems.

Step 6: Make the change sustainable. Old habits are often cemented in a company's processes and can reverse hard-earned progress. But there are additional steps that can be taken to make the changes stick and that can be very specific to each company's circumstances.

Manufacturing and service units can establish mechanisms for closely tracking certain critical KPIs. In other spending areas - such as SG&A, capital expenditures, and procurement - ongoing benchmarking against competitors can maintain the necessary focus on efficiency.

A corporate transformation

The six steps laid out here require investment of time and resources from senior management. This process is not a simple one but rather a sophisticated approach that not only aims to reduce costs but also to transform companies on every level. In an era of great turbulence and uncertainty, such an approach is more critical than ever.

Well proven methodologies can identify ways to improve efficiency and effectiveness

Methodologies and tools

* Benchmark against industry competitors
* Client and management interview and workshops
* Delayering and organisation structure analysis
* Internal and external surveys
* Activity-based optimisation
* Nonpersonnel cost analysis
* Functional KPI analysis

Cost excellence

Improve efficiency

* Identify how best -practice companies are functioning differently
* Identify organisational slack
* Find opportunities to bundle activities and synergies

Improve effectiveness

* Identify organisation pain points
* Identify gaps in functional performance
* Identify quality and service issues

By Amit Ganeriwalla, Jan Gildemeister, Jeff Wray, Reinhard Messenböck, partner, BCG; Markus Klevenz, consultant, BCG, and Gregor Gossy, project leader, BCG

First Published: Mon, September 16 2013. 00:07 IST