Cost Reduction

Cost Reduction is a process of reducing the expenditure to increase the profits. Most of the organisations go through this at some point in their life. It is a corrective action that is applicable to every aspect of the business and hence the process involves all the levels of management.

As an organisation prepares to reduce costs, the following has to be kept in mind:

1. There is no single idea or a silver bullet that would fundamentally change the cost structure

2. The extent of disruption is proportional to the degree of cost reduction

A successful initiative starts with the clear understanding of the cost structure. The general idea is to eliminate what could be wasteful/unnecessary/avoidable costs but it is easier said than done. The process involves analysing the costs and classify them as follows:

1. Necessary – It is essential for the business

2. Positive – They are important for the organisation to achieve its stated objective

Though it may appear that the above type of costs cannot be touched there could still be some opportunities to reduce the cost, every little helps could well be the objective here

3. Other costs – This could be classified further as an organisation analyses its costs

Cost reduction initiative involves developing a tailored programme for the organisation which requires a buy in from the top management and accountability from everyone involved.

The following are the steps involved in cost reduction programme:

1. Define your goal – This has to be both quantitative and qualitative. The cost reduction goal has to be realistic based on the actual spend, long term and short term objectives of the organisation

2. Spending Insights – The departmental heads/leaders know the intricacies of procurement processes, operating expenses etc. Involving them at the initial stage itself would help the programme

3. Identify potential opportunities

4. Identify behavioural changes required to ensure the cost reduction extends long term

5. Establish a governance structure – Governance is a process through which an organisation monitors and controls the business through policies, process and role assignments. Who is responsible for what processes, how to monitor, who will implement, the tools and structure etc. are all part of the governance structure

6. Follow through – The programme doesn’t run on auto pilot, a firm commitment and dedicated resources are required to follow through. Further, some of the cost reduction involves transformation of the process or behavioural change which could fall off easily

7. Be open and always look for alternatives – There could be some unexpected hurdles on the way which could derail the programme and hence it is always important to approach with an open mind and always look for alternatives as some initiatives could not be achieved with reasonable costs and within reasonable time

To succeed, an organisation has to ensure dedicated resources for the cost reduction programme. It could be internal or utilise the services of transformational consultants.