Your boss just handed you a cost reduction mandate. You’re probably feeling a little like Mozart in the classic film Amadeus, when Emperor Joseph II gave his feedback on the composer’s new opera:
Emperor: It’s quality work…There are simply too many notes. Just cut a few and it’ll be perfect.
Mozart: Which few did you have in mind, Your Majesty?
You know the cuts can’t be avoided, but you’re likely wondering how to maintain quality with a reduced budget. You’re not alone.
An increasing number of our clients are asking this question, prompted by the effects of the coronavirus. Clients realize that the new normal will call for many changes. Funding these changes, some already apparent and some less so, calls for more frugality elsewhere. This results in cost reduction mandates passed to divisional and functional leaders. These leaders find themselves in a tricky situation: If the work doesn’t go away, how will they maintain the same level of service on a reduced budget?
The ones right for you can be uncovered through an orderly approach to cost reduction. Here are three tips to help you respond to a cost reduction mandate:
- (Almost always) frame the ask as cost optimization. Unless your company is facing bankruptcy in the next three months, asking what (or who) you can afford to spare today is not the right question. Surgically cutting away parts of your business may boost your bottom line in the short term, but you’re almost guaranteed to lose competencies and cripple the business’s competitive edge. Rather, focus on a more organic approach to cost optimization, looking to change the “how” (not the “what”). This usually involves a process improvement such as standardization, automation, insourcing or outsourcing. While this may mean spending some money now, the savings generated will be higher and more sustainable.
- Target areas that deliver the least bang for your buck. Not all costs are created equal, which means forcing an equal "haircut” across all activities in your division is suboptimal. Determine each activity’s value and cost and look for the highest costs that deliver the least value. When quantitative value add vs. cost can’t be estimated through approximations such as activity-based cost analysis, it’s helpful to perform a qualitative approximation. In such an exercise, activities can be split into three tiers informed by your strategy: core, supporting and ancillary. Internal and external benchmarking then gives you an idea of how much should be typically spent on each tier. The set of activities with the greatest mismatch between benchmarks and reality is your area of focus for cost reduction.
- Collaborate with your team to reduce costs and win their support early in the process. As you probably know, implementation is where good ideas go to die. Research shows that up to 50% of initiatives fail due to lack of team buy-in. This means that in order to realize the identified cost-reduction benefits, you’ll need to ensure your team believes in the change. A tried and true method of ensuring this is having your team co-create, and thus be invested in, the change with you.