While the challenges of the current low-growth environment in 2023 might call for a whole range of responses, cost reduction remains among the most popular and effective in Danish and Nordic companies. Many organisations have already initiated different forms of cost reduction to rapidly improve financial results. Others are reducing costs to gain a competitive advantage and secure the business beyond 2023 – and finally, some are using cost reduction programmes to support investment in growth areas and reconfiguring the organisation for more long-term success.
However, even with good intentions, cost reduction programmes are not easy to implement. Changes such as reconfiguring P&Ls, business models or organisational structures often raise more issues than some organisations are prepared to address as costs are taken out. Moreover, without centralised direction and broad support, what is actually executed may not be aligned with the original plan, and benefits can be hard to realise.
Considering the upfront impact of cost reduction to people is just one element, but support after the fact also plays a big role in how organisations manage the changes that come from a cost reduction programme. In the same way that execution can suffer from a fall-off in leadership, maintaining cost reduction savings over the longer term is equally problematic. When such a fall-off occurs, hard-earned cost savings are given back and the impact of the overall programme is diminished – not to mention a return to financial underperformance for the company. In general, the more a cost reduction programme is seen as a once-and-done effort, the more costs tend to creep back in.
Some companies deal with these shortcomings by setting very conservative targets that are minimally invasive and readily achievable. While these savings may be realised quickly, the organisation is leaving profit improvement on the table for the sake of minimising disruption and gaining consensus. At the other extreme, some companies set overly aggressive targets, which often leads to ‘shadow functions’ popping up around the organisation as middle managers try to keep day-to-day operations going.
What gets measured gets done
Of course, there’s a better way as companies search for the balance between cutting too little and cutting too much. The most successful cost reduction programmes set ambitious yet achievable targets that create healthy organisational tension. They build on strong leadership and persistence to fully realise the savings.
Successful programmes also build on a consistent and measurable approach that includes governance and a dedicated management team that are ready to work with cost reduction at the structural level. Best practices include establishing detailed work plans by function and/or division, deploying consistent tools, outlining clear role accountabilities across the organisation, and defining a forum and frequency to track execution progress. Applying the right digital technology and analytic tools also has a major impact, not only in terms of transparency and the ability to make decisions based on data, but also to achieve business agility and – in the longer term – reshaping your digital infrastructure to match your corporate strategy.
Finally, change management is equally important, but often overlooked. Establishing a clear cost reduction change management plan – one that addresses strategy, stakeholder concerns, communication approach, project management and risk mitigation – is vital to create commitment, to drive new behaviour, and to support achieved benefits. Essentially, all leaders and employees tasked to support the programme should be engaged from the outset through a real and productive dialogue.
Creating a ‘cost-value’ mentality
To sum it all up, cost reduction programmes are not only meant to improve financial results and cut out unnecessary activities, but also to future-proof the business and thrive beyond the current volatile business climate.
The best cost reduction programmes are in fact a stepping stone to creating a cost-conscious culture that helps to maintain the benefits realised into the future.
Things such as improvements to budget planning and cost controls, cross-functional collaboration and an organisational ‘cost-value’ mentality should always go far beyond any programme. Once the programme is understood to be complete, the reset-cost baseline should become the new normal and leaders should guard savings achieved and lessons learned. The experience should not be forgotten and the lessons should be both maintained and periodically revisited to ensure behaviours and decisions continue to reinforce the desired level of cost discipline.
In my experience, even simple and visible actions taken by leaders can maintain the momentum and reinforce the new cost culture that is being nurtured. These could include setting and holding to revised spending thresholds, as well as implementing zero-based budgeting principles and generally maintaining more purposeful reviews of discretionary spend in the organisation. These are just a few examples; some are easy to implement, some are more difficult – but they all send a clear signal to the organisation around cost.
The fact is, continuing good cost behaviour is not an unreasonable expectation. But it doesn’t happen overnight and is therefore an important factor in change management plans. Institutionalising new ways to encourage cost-conscious behaviour can also be embedded into performance management to ensure a healthy focus on a continuous performance improvement culture going forward.
The secret is in not just identifying the savings, but making them real and making them stick – something that everyone can do if they put their minds to it, stay focused and committed.
As a part of the Strategy & Operations practice Tore has worked with analysis, development and implementation of operational strategies. Tore has deep experience with aligning business models to changing market demands through optimisation of business processes and aligning systems, organisation and governance accordingly. He has industry experience from manufacturing, transportation, consumer products and energy. His main focus is on on the operational core processes but he also covers administrative support processes. As a program manager Tore has been leading transformation projects for international clients heading multiple parallel projects and reporting directly to executive committee members. His responsibilities cover everything from initiating assessments, identifying opportunities for improvement to building business cases and following up by designing solutions and driving teams through implementation.