Costs that have increased over time relative to revenues, new market conditions or the need to release capital? There are many drivers to reduce a company’s costs. Axholmen’s experience shows that there is potential for cost reduction in all companies, both large and small.
Costs that have increased over time relative to revenues, new market conditions or new competitors in the market, the need to free up capital for investment in the business, falling revenue forecasts… There are many drivers to reduce a company’s costs. At the same time, Axholmen’s experience shows that there is potential for cost reduction in all companies, both large and small.
Regardless of the reason and the inherent potential of the company, implementing a cost reduction program is usually associated with challenges. In this article, we share practical tips that, based on our experience, are of great value in maximizing results.
Seven tips to maximize the results of a cost reduction program
1. UNDERSTANDING OF NEEDS AND GOALS, PREREQUISITES FOR RESULTS
A prerequisite for implementing a cost reduction is committed employees who understand the need for the change and thus want to contribute. Without an understanding of the need among employees, there is also a risk of getting stuck in endless and counterproductive discussions about goals and why a specific part of the cost base should be left unaffected, instead of discussing solutions.
2. THE BEST IDEAS ARE MOST OFTEN FOUND WITHIN THE ORGANIZATION
The best ideas are rarely found within the senior management team, and more often among the personnel. A key to success is finding them and ensuring that they are highlighted, given priority and taken through the company’s decision-making process.
3. CHALLENGE THE GAMEPLAN
Initially, there is great value in rewarding simpler measures with a high probability of success in creating success stories.
At the same time, our experience shows that if significant and lasting cost reductions are to be achieved, the “salami slicing” approach is not enough. By challenging the gameplan, i.e., to thoroughly challenge why and how things are done, greater and more sustainable potential will be identified.
While it is important to dare to take on more radical changes with great potential, it is also important to watch out for complex measures with undefined potential that risk tying up resources and over time lowering confidence in the program.
4. MAKE DECISIONS BASED ON FACTS AND DISCARD UNSUITABLE IDEAS
Involving key stakeholders and listening to them often results in good hypotheses. However, it is important to recognize that some key stakeholders may, for various reasons, fight hard to implement their own proposals during the course of the program, even though the proposals later in the process the proposals proved to be less relevant or even inappropriate. Be fact-based and help these people understand why certain proposals should be dropped.
5. LOOK AHEAD AND COMMUNICATE, COMMUNICATE, COMMUNICATE
Do not question why suggested measures have not been dealt with. It is counterproductive and employees will be overly cautious with their proposals, which can lead to important potential being lost.
Communicate success stories and highlight people who have made a good effort to motivate the organization.
Communication is perhaps most important at the beginning of the program or if the organization shows signs of exhaustion in later stages, but do not underestimate the need for continuous communication. By communicating even when there is few news, you show that the program is alive and remains important.
6. RESULTS WILL FAIL TO COME WITHOUT RESPONSIBILITY AND MANDATE
It may seem obvious, but unclear responsibility or lack of mandate to act is often a source of weak results. Make sure that each action has a stated owner and that this owner has mandate to implement what is decided. Be extra careful in matrix formed organizations where the mandate required for an action is not necessarily given by the usual reporting lines.
Furthermore, the measures should be highlighted in future budgets to secure lasting results. Also, do not underestimate the value of properly calibrated incentives in governance when extraordinary efforts are required by the organization.
7. GET THINGS DONE BY FOLLOWING-UP
The program should be followed up on several measures, but the focus should be on value of the measures in order to maintain focus on the overall result. Our experience shows the importance of the senior management team being able to maintain interest during the whole process so that the measures do not fizzle out or that the costs start to increase again.
At frequent intervals, the program management team should follow up on whether measures continuously go from “hypothesis” to “book” and that new hypotheses are collected. Strive to incorporate an iterative approach. A subset of the hypotheses will be rejected when they are verified and raised to a decision, but our experience shows that an iterative approach ensures that the rejected hypotheses are replaced by new ones.
A successful program leaves behind a working culture in the organization, where employees continue to look for new improvement measures on a frequent basis.
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