BUSINESS FIRST INNER 39-82:Layout 1 9/6/08 16:54 Page 54
54 KNOWLEDGE
THE COST SQUEEZE
It’s what happens after a credit crunch.
But how to cut costs effectively?
Andrew Wileman has some thoughts.
Once the people in your organization believe
that you’ll keep on asking until you get a good
answer, they’ll come up with the goods. But you
have to earn that belief with tenacity and single-
mindedness. The opposite is also true. If people
know that you can be snowed or deflected, if they
When CEOs and managers ask “Is
know that you’ll forget to follow up meeting after
there a secret to getting cost out?”
meeting or that every review will bring a new CEO idée du
they are thinking of sexy concepts like
jour, then you’re dead in the water on cost management.
activity-based costing, zero-based
budgeting, reengineering, life-cycle
Short Timeframes
costing. These can be useful but they are
Good cost reduction never got achieved with a five-year plan. Cost
not the key to success. The key to success is
reduction gets achieved when you push for fast results.
annoyingly simple: persistence. You ask the same
Over the last 30 years one of the big changes in business has been
question again and again. You push for better results and you keep on
the compression of planning timeframes. This is true for exotic activities
pushing. This is true for a manager, a consultant working around
like strategic planning. One of my earliest consulting assignments in
management on a cost-reduction project, or a non-executive board
the late 1970s was a strategic planning review for a big UK corporate
member challenging the CEO.
where we developed 10-year and 20-year financial scenarios! In most
of my work now with technology companies we focus on the next
A friend of mine is a partner in private equity in London. Cost cutting is
quarter’s financial targets in detail, and our strategic planning horizon is
a key part of how private equity firms extract more value from
the following 12 months.
businesses. My friend says the only key ingredient for success in cost
cutting is persistence. Once managers understand that the cost
The same timeframe compression has occurred in cost
questions are going to get asked again and again, that they will be
management. Thirty years ago I might have seen a plan where some
pushed and pushed until they achieve serious results, they find new
core costs drifted down gradually over three to five years, or where an
cost-reduction ideas to put on the table.
overstaffing situation was slowly unwound over several years by quiet
natural attrition. These days the question would be what progress we
I was once working with an American company in Miami on a project
can make on those costs in the next week, the next month, enough if
to cut the cost base by 15%. (The target is almost always 15% – it
we have to bite some painful bullets.
sounds nasty but achievable.) I was working through the management
group on my initial rounds of interviews and as usual everyone was
The God of Small Percentages
stonewalling. They were offering painless 2 or 3% savings, like flying
When developing your plans, it really helps to understand the power
coach rather than business or canceling the customer conference
of compounding, even small improvements year on year.
that year – also normal tactics.
Say you can get your unit costs to decline by 1% a year. Getting
The first one to crack was the customer service manager. We were on
that improvement takes a lot of effort. You might feel frustrated and
about our third-round interview and she said, “You know, I’ve been
that it’s not a big enough prize for all the effort.
thinking about this, and if I’m really honest and smart about it I reckon I
But say your competitor, who isn’t making quite the same effort, can
can get more than 15%, I can get 20% of the cost out, with some
only hold its unit costs flat. Within five years you will have built up a
pain and some risk. Here’s how I could do it…” I remember that
5% cost advantage. If you pass half of that on to customers you’ll
process very clearly, because all I’d really done in that series of
take share from the competitor – and your increasing relative scale
interviews was turn up smiling and keep on saying, “We just have to
will accelerate your cost advantage momentum. Project that trend
find ways to get these cost savings, we just have to find ways to get
out ten years and your competitor is dead.
these cost savings.” And she rose to the challenge. Other managers
stonewalled for longer or never came up with the goods. The
Strategic cost managers worship the God of compounded small
customer service manager powered up in the outside lane and was
percentages.
CEO five years later. She was obviously CEO material from her
performance in those early interviews, and she has carried on being
Source: Andrew Wileman is author of Driving Down Cost
as persistent with her management team.
(Nicholas Brearley 2008) www.drivingdowncost.net
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