Turn cost cutting into cost effectiveness
Fit for purpose
When it comes to heart disease, appearances can be deceptive. You can be carrying very little fat, but still be at risk, because of the invisible damage inflicted by high cholesterol. Similarly, in organisations, you can pare existing costs to the bone, but if you haven’t questioned the need for those costs in the first place, your corporate arteries may remain dangerously clogged.
To unclog them, you need to:
- Seek out self-imposed overheads
- Challenge your business model
- Change your compliance mindset
- Measure and improve productivity
Seek out self-imposed overheads
Simply sending out an edict for ‘10% cuts across the board’ is rarely helpful. A far more useful exercise is to start by examining your operating model. Next, you need to delve into the detail: find out what people are doing all day, and how much of it is actually worthwhile. Once you start looking, you find that history is responsible for a huge amount of low value, even no value, activities, which strangle productivity.
Usually, you can free up costs by: reducing frequency and unnecessary accuracy; eliminating low or no value activities; standardising and simplifying tasks and processes to reduce complexity; or making sure work is done in the most effective location to drive performance. Then, you can either take the savings and put them in the bank, or reinvest some of it in high value activities where you are underweight.
Challenge your business model
No one is under more pressure to find a new, lower-cost business model than a public sector CFO. With governments around the world having to balance a finite revenue base with the need to reduce sovereign debt and meet the ever growing service demands of an ageing population, traditional approaches to “doing more with less” are no longer sufficient.
Many governments, agencies and their CFOs have been forced to go back to first principles and revisit their fundamental raison d’être. Corporate CFOs should follow suit. Putting people and outcomes at the centre of your organisation opens up new ways of thinking, leading to powerful ideas for driving agility in your business model.
Change your compliance mindset
There’s no question that regulatory requirements are tougher now than ever before. In dealing with more interventionist regulators, organizations must demonstrate compliance across an increasingly complex array of areas. Compliance is not negotiable. But it’s not whether you respond, it’s how you respond that can make the difference.
“With a different mindset you can minimise the impact to your business, reduce the gap between what your organisation says it does and what it actually does, and create a simpler, more cost effective, and more successful compliance strategy.” Rob Walsh, Partner, Risk, EY Australia.
Measure and improve productivity
In addition to focusing on inputs, CFOs are now paying more attention to outputs and unit costs. The result of taking this ‘production view’ can be a sustainable 20% increase in productivity, adding millions to your bottom line. If you can see both sides of the equation, you can identify specific actions to reduce your output unit costs. In our experience, the resulting sustainable productivity improvement can deliver $100+ million performance benefits.
In the current economic environment, it’s time for every organisation to understand, measure and focus on improving its productivity-related metrics. This is not just important at the organisational level, it’s also the only way to lift national productivity and improve global competitiveness.