Slower economic growth coupled with inflation and rising interest rates has resulted in cost pressures across multiple industries. Many companies have witnessed their costs increase in the face of revenue challenges, creating an unsustainable environment. In response, companies are looking to reduce costs to retain customers, manage finances, and meet shareholder expectations. Corporate Services leaders may be charged with savings in their specific functional domain or may be required to lead organization-wide savings initiatives under financial or restructuring objectives. Each mandate, regardless of scope, requires a methodical approach. Our proven, seven-step approach described below showcases the importance of the right steps in the right order to make the biggest impact.
Step 1: Establish and Communicate the Cost-Reduction Imperative
Establishing and communicating an easily understood imperative will help to ensure buy-in at all levels. Healthcare has an imperative related to reduced revenues as the population ages and moves to Medicare, reducing the average payment for services. Another such imperative is using shareholder expectations to help communicate the need for cutting costs (e.g., comparing management aspirations for earnings per share (EPS) to industry and/or analyst expectations (see example chart below).
Step 2: Gain Senior Leadership Alignment and Support Early in the Process
Conducting a cost-reduction planning workshop with senior leadership will ensure alignment and support for the cost-reduction process. Consider the objectives as well as the outcomes and deliverables you want to achieve. Examples are shown below.
Gain senior leadership alignment and support for the cost-reduction imperative.
Establish a common philosophy and understanding of cost-reduction expectations/priorities, approach, process, critical success factors, and potential issues among the leadership team.
Develop preliminary components of the cost-reduction roadmap.
Establish company readiness to “jump start” the cost-reduction process.
Cost-reduction objectives, goals, and scope
Cost-reduction critical success factors, design principles, approach, and potential issues
High-level, cost-reduction timeline
Preliminary cost-reduction management structure and roles and responsibilities
Preliminary areas for improvement (cost reduction and organizational performance)
Step 3: Determine Your Cost-Reduction Approach
Four cost-reduction approaches are predominant. Each approach varies as to its ideal application and time to implement.
Benchmark Driven
Reductions are set using functional or process benchmarks.
Organization Driven
New, leaner organizations are designed; headcount is selected for all or new positions.
Target Driven
Top-down reduction targets are assigned to functions; functions individually determine how targets will be achieved.
Process Driven
Work elimination and streamlining through process redesign result in reductions.
Often, the best cost-reduction approach for an organization can be crafted using elements of each of the methods. Regardless of the cost-reduction method, an ideal approach should:
Fit the organization’s culture
Achieve reductions with minimal impact on employee morale
Retain high-potential and high-performing employees
Reduce work where necessary to ensure savings are sustainable
Step 4: Document and Communicate Your Cost-Reduction Roadmap
To achieve buy-in to the changes, it is important to clearly document and communicate the reasons, plans, and timing of the initiative. Consider these elements in your communications:
Imperative and Objectives
Describes the need for cost reduction and the desired outcome
Provides clear understanding of cost-reduction needs and objectives to employees, customers, and other stakeholders
Clearly identifies organizational priorities
Decisions Already Made
Communicates key organization, operations, and infrastructure decisions that have already been made
Provides clarity for participants during detailed design and implementation plan development
Critical Success Factors and Principles
Defines success and what principles are to be followed during the cost-reduction process
Communicates an understanding of organizational values, beliefs, and philosophies
Approach, Process, and Timeline
Defines the approach and process by which cost-reduction initiatives will be identified and documented
Identifies and brings together key corporate planning and cost-reduction milestones
Sets the pace and cadence for the cost-reduction process
Implementation Priorities and Critical Milestones
Describes leadership’s expectations for implementation priorities
Identifies critical implementation milestones to achieve cost reductions
Management Structure and Roles
Clearly defines roles and responsibilities for all participants
Establishes decision rights and the decision-making structure
Defines the interfaces of various resources and efforts within the cost-reduction process
Step 5: Establish a Phased Process that Focuses on Sustainable, Transformation Change
Phase I: Establish the Cost-Reduction Imperative
Phase II: Develop the Blueprint
Phase III: Perform Detailed Design
Phase IV: Implement Designs
Define strategic issues and the need for reducing costs
Define what success looks like
Establish corporate-wide cost-reduction goals
Determine cost-reduction approach and scope
Identify preliminary areas for improvement
Establish the cost-reduction framework and communications plan
Perform current state assessment
Finalize improvement areas
Establish business unit cost, staff baselines, and reduction targets
Develop functional guidance and design criteria
Identify and document cost-reduction initiatives
Define and document impacts to service levels and risks
Define organization design guidance
Finalize organization design and staffing levels
Define performance metrics
Establish business plans and future year budgets
Implement business plans and cost-reduction initiatives
Complete policy, process, and tools and technology adjustments to rewire the organization
Implement staffing, change management, and facilities plans
Monitor implementation and track results
Key Questions to Address
Why do we need to change?
What are we expected to achieve?
How will the cost-reduction effort be structured and managed?
What are the targets and opportunities?
What will we look like?
How will we achieve cost reductions?
What actions must be taken to get us there?
Have we considered all constraints and dependencies?
Step 6: Conduct the Cost-Reduction Exercise “Top Down” and “Bottom Up”
Using both a top-down and bottom-up approach allows you to create the most successful and sustainable plans by providing guidance and expectations while depending on your people to deliver on the details.
Senior leadership should set the top-down expectations by first selecting the expected approach to complete the exercise. Next, they should define the timelines required for the process and set targets/parameters on cost savings and organizational changes.
Functional teams should build the plans bottom-up by using top performers from multiple levels of the organization. The teams should identify the future managers of a function and involve them in the process, as possible. It is important to provide the resources and latitude the teams need to be successful and encourage new approaches and ways of thinking.
Final plans should be challenged by the leadership team prior to approval. Leaders from each functional area should present their approach and encourage peers from other functions to question and challenge everything, including plans, assumptions, targets, etc. During this challenge period, ensure everyone is maintaining an open mind, and adjust plans as needed.
Step 7: Ensure Long-Term Sustainability by Building Savings in Budgets and Initiatives in Business Plans
Budgets
Business Plans
Ensure cost reductions are included in future multi-year budgets
Avoid making cost savings one-time “management challenges” or solutions to plug one-time gaps
Track and report on the key drivers for budget
Maintain monthly budget discipline
Take the time to build bottom-up budgets to justify all costs
Build all initiatives into multi-year business plans
Align strategic goals and cost-savings goals to avoid conflict and support success
Create the right metrics to track initiative progress and report regularly
Provide progress updates on actions taken on a consistent basis
Re-evaluate initiatives annually to make sure desired results are still on track
Do not lose the cost benefits of your team’s plans by not maintaining momentum and discipline long term
KEY SUCCESS FACTORS
Obtain CEO support (a platitude, but essential), then gain support of his/her directs.
Establish a project structure with employee teams, one that is internally led. Consider the role of outside help—the project cannot be centered around consultants “chopping” costs, but consultants can help guide the process and help the teams achieve success.
Establish a great core project team with recognized internal stakeholders to drive the process.
Set reasonable targets informed by clear rationale.
Focus on sustainability in cost reductions.
Ensure the appropriate process work, organization rewiring, and change management occurs.
Make sure cost-reduction initiatives are “actionable” and clearly connect the path from current to future budgets.
Track and monitor cost-reduction initiatives as they are being implemented to ensure they achieve cost savings.
This approach helped one client save more than $500 million in annual costs
We work step-by-step with clients to ensure each project’s success. Our strong team of consultants employs an adaptable framework to guide clients to the best decision for their unique situations. We do what we say we are going to do, with integrity, tenacity, and a genuine passion for the work throughout the entire project.
Sussex Economic Advisors is now part of ScottMadden. We invite you to learn more about our expanded firm. Please use the Contact Us form to request additional information.
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