Short term cuts are easy; but making them stick is more difficult. Sales, general and administrative (often grouped as ‘SGA”) prove to be particularly intransigent. While manufacturing efficiencies have improved in recent years, SGA remained more or less at same levels.
The reasons given, according to research conducted by McKinney’s (UK) is that most organisations fail to do a thorough bottom-up examination of what should be cut and hence identify the true drivers of cost. In the midst of a crisis, senior management look for easily available areas to cut and often, line management apply draconian targets over the medium term in an indiscriminate fashion across ‘cost centres” without discriminating against which of those add vale and those that aren’t as productive in terms of use of capital. Others use inaccurate and incomplete data to cut costs, thus missing opportunities to make long term effects
While there is no silver bullet to get cost cuts to stick, there are five ways that managers can make a difference.
1. Improving accountability. Few would dispute that accountability is necessary for the cost management exercise to succeed. The CEO and the CFO must be highly visible proponents and provide critical energy and motivation but this is not in and of itself, sufficient. Most cost management occurs at lower levels of the organisation. In one large multinational the CFO had little information as P&L made it difficult to analyse for example if freight costs had increased it is was difficult to analyse whether this was due to rises in direct freight costs or through third party providers in sales.
The company resolved that those with the decision making power had to be accountable. For example a sales manger may ultimately be accountable in deciding whether it was necessary to travel interstate for a meeting or whether a video conferencing solution was the choice. The people responsibile for costs need to be the same people who are paid on performance.
2. Making new policy. Managing to a ‘number’ results in flawed decisions; a more enduring approach should be around setting new policy. Such a policy can come from external benchmarking. While these may be too general to be useful (for example when looking at a specific such as sales travel expenses) internal benchmarks are easy to get and give managers more power. Here, mangers can analyse major categories and then set aggressive targets. To make them stick they would reference to the benchmarks, highlighting individual managers who may need ‘educating”.
Join the CIO Australia group on LinkedIn. The group is open to CIOs, IT Directors, COOs, CTOs and senior IT managers.