If one thing is certain, it’s that the second half of 2020 will have been all about controlling operational costs. The revenue of most organisations has taken a huge hit in recent months, so businesses are pulling the emergency brake on costs in order to give them a fighting chance of survival.
Operations, as my colleague Steve Russell has said, is one of the four critical areas to watch as the post-pandemic recovery begins (along with cash and liquidity, stakeholder management, and strategic options). Like the tyres on a car, it only takes one to fail for a catastrophe to happen. So the question for operations is, what do you need to do immediately to get back to ‘normal’? The answer, inevitably, is to reduce costs as much as possible. But this comes with a health warning.
While businesses will have navigated a recession before, this isn’t familiar territory. We don’t know how quickly the economy will recover and some aspects of business – notably consumer behaviour – have probably changed forever. The rules aren’t the same, so the generally accepted approaches to cost cutting may no longer apply. Setting broad spending targets at function level and expecting everyone to make savings within their own silo is no longer enough. A more elemental approach to cost cutting is needed if businesses are going to withstand the uncertainty ahead.
So we must focus on value. The overriding philosophy has to be that no cost is incurred in the business unless it adds direct value to the end customer. This approach won’t be unfamiliar, as it’s the way that many businesses tend to think about third party spend – but now it’s time to apply this approach to what people within the organisation are doing on a daily basis.
Many of those valueless costs are hidden in plain sight. Think for a moment about how many internal reports are generated by your business every week. Who reads them? What purpose do they serve? Are they ever acted upon? Would they really be missed?
The answer, more often than not, is no. I know this from my experience of working with clients with the help of our digital Activity Value Analysis (AVA) tool, which analyses the financial cost of workforce activities against the value they generate for the organisation. Time and time again, an AVA analysis uncovers a host of surprises. Unproductive meetings, duplication of activity, unnecessary gold-plating (five star spending when two star will do), unread reports – in truth, the sort of things that drive people mad about their jobs on a daily basis.
It takes this level of analysis to truly understand the cost base – and we’ve seen AVA uncover evidenced-based opportunities to reduce costs by as much as 25%. If you look this carefully about how people spend their time, you can focus on the value-adding activities, think about how to do some things differently (like automating or outsourcing some processes), and safely call a halt to anything that adds no value at all.
Placing value at the front and centre of cost has to be the priority, but here are five more important tips:
Time is a valuable commodity in a crisis. The earlier you act, the more time you create for yourself to make considered, radical decisions. Companies that take cost-cutting decisions too late – perhaps because they’ve spent too long discussing what to do, or get caught up in analysis paralysis trying to reach the absolutely perfect solution – run out of space to act, which can lead to a panicked, slash-and-burn approach.
Forcing through the most difficult decisions at an early stage may be painful, but it does serve to focus everyone in the business on the seriousness of the situation and on the strategy that’s been put in place to address it. Rapid decisions help to build momentum.
Mistakes are inevitable when a company is making rapid decisions. No idea is a bad idea, but don’t waste time analysing why something isn’t working – cut your losses and move on quickly. Even if your failure rate is 10%, if you keep moving you will get the remaining 90% done.
Sometimes, a cost-cutting measure that saves relatively little in terms of cash can be invaluable in signalling intent. High profile cuts that disproportionately affect senior management send an important message throughout the business – that we’re all in this together.
The entire stakeholder community will be watching, and worried. It’s important that the business is able to remain proactive in the coming months, rather than reactive, so messaging needs to be as clear as possible, and based on a solid understanding of the stakeholder environment, from suppliers to the pension scheme.
A truly effective cost control programme has to be based on a detailed understanding of the organisation’s cost base. Asking every department to find a blanket 15% cost saving, without any understanding of the drivers of cost or value, achieves very little. The trick is to distinguish ‘good’ costs – the spending that will get you out of trouble – from the rest. With that understanding, a business will be in the best position to weather the storm.