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A Wise Approach to Tackling Cost Reduction

Corona Virus has changed the world around us fundamentally.

For many businesses returning to whatever the “new” normal represents, there will be a need to adjust cost structures downwards. Margins may be stretched. Competition may be harder and cash flow will be king, even more so than before.

Cost reduction isn’t new. Up the start of the noughties, the economy used to run in cycles of about five to seven years. Managers got used to cutting their cloth in recession and then relaxing in upturns. However, this particular bull run has had an unusually long duration so many may be unfamiliar with the techniques of reducing costs and maybe even restructuring. If you are a novice in the art of the downturn, it may be useful to see the danger residing in following the practices pursued by many in the past.

Two common but pernicious approaches are:

1. Slash and Burn

Professor Malcolm McDonald uses the term “anorexia industriosa” to indicate the consequences of an overzealous cost reduction campaign which results in often fatal damage to the fabric of the business. One example is seen in local government in an occasional politically driven desire to outsource without the support of a comprehensive cost: benefit analysis and strategic plan. The necessary integration with existing services is overlooked, perhaps with disastrous consequences. Elsewhere, over-eager external consultants, keen to demonstrate great returns, can often lead to companies cutting into the fabric of the business.

A) Arbitrary percentage reductions

An equally foolish approach is the imposition of an arbitrary cost reduction target, say 10% all-round, which can damage parts of the business already robustly managed whilst allowing the weak or political to carry on with unnecessary waste.

Effective restructuring or cost reduction needs careful planning, a detailed if not forensic understanding of the business and an absence of politics, sacred cows or favoured sons.


B) A few thoughts:

1: The starting point is always an understanding of the market and your products in terms of net margin and overhead absorption. Does each make money or are some vanity projects? Are you selling to suit your agents’ or reps’ commission rather than the company’s interest? Are you focusing on the right products? How do you see your product profile over the short, medium and longer terms? Is your new product development programme adding too much complexity and cost?

Always work backwards from the market, and to do that you need to understand it.

2: Get the organisation to thoroughly understand value-added and non-value-added activities. In the busy world that we work in, our allocation of time tends to be managed in a reactive fashion. However, if we clearly analyse how we allocate our attention, we inevitably find that we spend a disproportionate amount of time adding no value. The more we analyse, the greater our appreciation of just how much waste is around us.

A simple exercise: set your alarm to ring every fifteen minutes for a week and simply note down what you are doing. At the end of the week carefully categorise those activities into value-added and non- value-added. The results will frighten you. All those meetings you attend probably represent less than 20% of the best use of your time. All the phone calls you immediately respond to may be pleasantly distracting but again are mostly of poor value. Likewise, with emails, reports etc. Waste is everywhere and is costly, not least in taking up management resource.

By getting the organisation to understand added value, which incidentally is not straightforward as perceptions change as you go along, you will rapidly improve. The Japanese techniques around Gemba Kaizen can be very useful here.

3: Think Zero Base: Organisations tend to grow inefficiently in good times as priorities are focused on getting product out of the door. These mountains of often little changes slip through as canny managers use the opportunity to build their own empires or simply make life more comfortable. Departments expand, procedures explode and complexity flourishes. Costs creep up and efficacy slips.

Here the idea of thinking through the organisation from a zero base has its attractions. Visualise, with your colleagues, what you would do if you were starting again from scratch. Aggressively challenge all assumptions as your charges might have vested interests. Emphasise that at this stage it is just a paper exercise designed to look at the world in extremis. The Japanese technique of asking “Why?” several times can benefit you here.

Once you have the Zero-Base Armageddon plan, simply compare it with what you have now. And then really challenge the arguments against change. At the very least you will understand your business better. More likely you will uncover some unexpected opportunities.

Change fails most of the time as we have seen in the NHS over the past twenty years. But it fails through a lack of foresight and clear thinking. When it comes to cost reduction, the knee jerk may be easy but it could be costly and demoralising in the longer term.

Prof John J Oliver OBE, is leading expert on radical employee engagement, is a Masterclass speaker and former CEO of Leyland Truck. At Leyland Trucks, Europe’s largest truck manufacturer, he transformed the company from an unprofitable, declining truck-maker into the most cost-efficient operation of its kind in Europe through employee engagement.