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Strategic Cost Reduction Journey

Steps to sustainable and scalable change

Strategic Cost Reduction Journey. Here are some thoughts and lessons learned from our experience in supporting our clients to be more cost competitive

Starting a Cost Reduction Programme

1. Where do you start?

Organisations are faced with increased cost cutting pressures, the question becomes: Where do you start? Where and when should you cut, invest, or do both? This report seeks to provide you with answers to these questions. 

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2. Rethinking a company’s business model

The first step in improving your cost structure is to verify you have a well defined business model. Serving as the blue-print for all the future business activities, your business model should support your efforts to realign operational governance or restructure your functional service delivery mechanism.

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3. Aligning operational governance with the business model.

After clearly defining your business model, you should consider aligning operational governance with the company’s business model to help position the company to deliver on its promise. Operational governance – not to be confused with corporate governance – addresses how a company’s decisions are made and executed. Without effective operational governance, structural inefficiency can occur, which companies can ill afford, in particular an economic downturn, slow recovery or global macroeconomic challenges. Symptoms can include confusion and conflict between corporate and individual business units, turf battles, duplication of efforts, and organisational blind spots. Effective operational governance can provide the foundation for lasting improvements. Yet, it is the one step that companies are most likely to overlook in restructuring or making organisational changes.

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4. Redefining functional service delivery to achieve organisational scalability and efficiency

Since there are varied types of work and ways to perform them, a service delivery model (SDM) serves as a way to help you tell the work types apart and evaluate their ultimate impact on company performance. An SDM starts with the notion that there are four different types of work for each functional area. How that work is organised and managed will be different for each of the four types.
Eliminating, or at least significantly reducing, random allocation of resources is at the heart of what an SDM is designed to help you do. This means aiding you in understanding the various ways work gets done and answering questions about what, where, who, how, and why?

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5. Enterprise Cost Reduction

Cost reduction programmes are commonly carried out in silos, without much more coordination than each having some portion of an overall rand target to meet. And then the task becomes so complicated and fraught with sensitivities that little happens in the way of sustainable efficiencies. But it needn’t be so. If you go to the trouble of mobilising for cost reduction, you might as well make it stick, and create some competitive advantage along the way.

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6. Selling, General & Administration (SG&A) Cost Reduction Focus

Top performers also focus across all SG&A (selling, general and administration) functions and business units, and not just functions like HR and finance, because making improvements ad hoc or in silos doesn’t make a broad enough impact. The improvement levers that match the business strategy are across a set of SG&A functions, often including shared services centers, process reengineering, strategic sourcing, controllable expense reductions, ERP implementations, and quality and process management.

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7. Selling, General & Administration (SG&A) Cost Reduction Focus

A company’s business model prescribes not only how business units will associate with each other and with corporate headquarters, but also how SG&A functions operate throughout the company. Any SG&A improvement program must take into account how the company’s larger business model affects the SG&A infrastructure, both when looking for improvement opportunities and when recommending solutions to existing problems.

In this article we look at the four basic business models. Click here to download the full report.
 

8. Selling, General & Administration (SG&A) Cost Reduction Focus

Crucial to any cost-reduction effort is to understand what work gets done, how it adds value, and where that work should be located within the organisation. In our experience, there’s typically a huge gap between where most companies currently perform work and where that work should be performed for greater efficiency and flexibility.

Making use of the Deloitte “lean staff model” method has proven particularly successful in scrutinising how key work processes deliver value.

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9. Selling, General & Administration (SG&A) Cost Reduction Focus

Another major component of building a scalable SG&A base is to eliminate processes that don’t add value and streamline those that do as much as possible. The following questions can help determine whether an activity adds value:

  • Could this activity be eliminated if some prior activity were done differently?
  • Could this activity be eliminated without compromising the quality of our product or service?
  • Is this activity required by a customer, and will that customer pay for it?

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10. Selling, General & Administration (SG&A) Cost Reduction Focus

A surprising number of companies overlook controllable expenses (CE) − companywide non-production expenses such as employee travel and supplies in their cost-reduction efforts. In fact, CE runs between 50% and 60% of non-production costs, which is typically more than staffing costs. Although controllable expenses are not directly associated with SG&A restructuring, they present a significant opportunity not only to reduce costs without compromising customer value but also to improve efficiency and effectiveness.

Another upside: CE cost reductions are often relatively easy to implement, as they typically don’t entail the political sensitivities and human resources impact of a restructuring.

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11. Selling, General & Administration (SG&A) Cost Reduction Focus

For most companies, establishing a sustainable and scalable SG&A structure requires a fundamental transformation in how SG&A works. A transformation of this magnitude cannot be imposed from on high. To fully take hold throughout the company, it must be accompanied by a change management program that focuses on both organisational change management and personal change leadership. The “hard” tangible variables of the organisation, process and technology change must be addressed alongside the “softer” intangible variables: leadership, people, communications and culture.

The mission: Change the way the work is being done, develop employees so they can operate in a new environment and free them to think in new ways.

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Deloitte’s Strategic Cost Reduction Infographic

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