Many organisations both in the private and public sector are currently looking for dramatic reduction in their cost base. Given the current economic climate and expected decline in revenues frequently they simply have no alternative. Each entity must choose its own particular path, but most face similar issues, even though the answers may differ.
Tim McCormick, a speaker at this year's Annual Conference, outlines some of the questions to address, if the savings are to endure.
1. How much time have you got to produce a viable plan?
If a financial crisis has arrived and pressure is being exerted by the banks, there may be no time to think strategically for the longer term. Unfortunately emergency cost cutting may do permanent damage to the business.
2. Is cost cutting taking place in every department at present?
Unfortunately some managers do not give sufficient priority to sound cost management. A quick improvement may be possible by a selective targeting of errant departments.
3. What level of cost reduction is the minimum acceptable?
As much as possible is not a useful answer, because of the dangers in developing corporate anorexia. On the other hand a minimum is necessary for survival in the short run. Short and medium targets can help.
4. Can budgeting deliver the target?
If the gap is large traditional incremental budgeting is unlikely to be sufficient. Zero based budgeting might help, but still may prove inadequate.
5. How can cost reduction fit in with the overall strategy?
If the business competes based on differentiating itself from the competition, certain aspects need to be preserved. Nevertheless value for money is critical.
6. What are the strategic drivers of cost competitiveness?
There can be many different reasons for cost problems, such as the scale of the business, pay agreements or capacity utilisation. What is the root cause of your problem?
7. What values need to be protected?
Haphazard cost reduction may do permanent damage to relations with customers, staff or suppliers. Check the risks entailed in any plan.
8. Would unit costs be lower if the business were double the size...or half the size?
There can be diseconomies of scale as well as economies. Does the business need reorganisation to benefit?
9. Does the business adopt modern operational tools?
World class organisations have benefited from advances, originating from leading Japanese and US organisations. Is there waste which needs to be eliminated?
10. Should some activities be outsourced?
Few businesses can be leaders in all aspects of their trade. Are there non-core activities in the value chain which could be better performed by others?
11. Does the workforce need fundamental reorganisation?
Some industries, such as construction, have come to rely less and less on a permanent labour force. Should there be more reliance on sub-contractors and temporary workers?
12. How will you monitor your plan to avoid long term damage?
If quality and customer service are critical, how will you be certain that standards are maintained? Ensure that you do not suffer death by a thousand cuts.
Tim McCormick is one of the author's of a new book by ICAI Publishing - Strategic Cost Reduction - which is due to publish on 6 March 2009, priced at €19.95. Copies can be ordered by contacting publications@icai.ie or online at www.icai.ie/shop/books. It is also available at major bookshops.