Making cost savings real and making them stick

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.