Reducing Costs Strategically

Successful companies are driven by a clear, energizing vision that involves a portfolio of products and services; but vision will remain just words unless it is grounded in business reality. The business disruptions of the pandemic have forced many organizations to take a step back and look at their ability to deliver these products and services and to secure their place in the market. Changes in demand, supply chain issues and market uncertainty have forced many organizations to look for ways to reduce costs in order to maintain profitability and often, just to stay operational within an uncertain, new normal.

Across the board cost-reduction mandates rarely produce sustainable results

In most organizations, the cost of certain functions could be reduced by as much as 80 percent; in other areas, particularly those that fuel the top line, investment may need to be increased.  To target the areas of greatest opportunity to eliminate excessive costs that are hard-wired into the business and avoid cutting muscle, it’s important to ensure that costs don’t creep back in (for example, through the use of expensive contractors). Cutting costs strategically is best done by taking a critical look at business processes.

If you think of business processes as a set of bridges that span the gaps between vision and action; these processes are nothing less than the way work gets done. Consider the three, main types of business processes:

  • Line workflows, such as business generation, product development, and order fulfillment;
  • Staff workflows, such as hiring, accounts receivable, and conference planning;
  • Management workflows, including strategy development, resource allocation, and performance measurement.

One approach to identifying potential cost savings is a process improvement approach with the goal of reducing costs strategically

Process improvement teams can take a step-by-step approach to identifying and analyzing key processes for opportunities for cost savings. Any processes that can be improved to yield cost reductions must be considered in relation to other factors including quality, speed, sustainability, etc.

By using process improvement steps, teams can work together to identify and exploit potential costs savings.

1. Identify Processes to Improve: Determine the key processes that drive the workflow in your organization and consider how they can be redesigned, improved, created or eliminated to help reduce costs.

2. Structure a Process Improvement Project: Using a team approach, focus on opportunities to reduce costs within key processes.

3. Document and Analyze the Current Process. Within a process, identify strengths and weaknesses. By analyzing the current process, the team develops an understanding of what can be changed and what is working well. This provides a starting point for changes that can reduce costs more strategically.

4. Design the New Process. Based on a solid understanding of the existing process, the team is prepared to develop alternative future processes. Using specific criteria around issues such as quality, sustainability, speed, etc.  Alternatives can be compared against cost savings objectives. This may result in a hybrid of several alternatives.

5. Develop Metrics. In addition to cost savings, measures should address both customer-focused dimensions like quality and cycle-time, and internal ones like safety. Together these metrics provide a “balanced scorecard” of process performance.

6. Develop the Implementation Plan. This plan includes not only changes to the process flow and monitoring, but also any changes required in policies, resources, systems, forms, job design, skills and reward systems.

7. Implement the Plan. Successful implementation should be accomplished in an acceptable amount of time, involve any needed technical expertise in areas like systems design and job design and commitment from all involved.

8. Manage the Process. Ongoing management and continuous improvement of the newly designed process may include planning and budgeting, monitoring process metrics already developed as well as regular process reviews.

A Case Study

At a consumer products company, inadequate account set ups were costing between several hundred and several thousand dollars per incident (depending on when errors were discovered).  Forty percent of new accounts were set up with incomplete or inaccurate data causing a ripple effect of problems, from forecasting and shipping to billing. In analyzing the set-up process, the improvement team found two critical problems. First, it was difficult and time-consuming for sales staff to provide the correct information during account set up. Second, the handoff of information from the customer to sales to customer service left too many opportunities for human error.

The improvement team tackled the set-up process with some key improvements. They established a commission incentive for correct set ups to encourage sales staff to include accurate data. They provided new customers with an electronic set up form that could be transmitted directly to customer service. They guaranteed delivery-to-request to those customers who provided accurate and complete account data. They educated sales staff and customers on the improved process.

The result? Now less than five percent of new accounts are set up with inaccurate or missing information—before this was 40 percent—creating huge cost savings. In addition, the customer service operation was suddenly overstaffed since people no longer needed to chase down correct customer data. Customer service reps were reassigned or redirected to identifying and improving other components of customer satisfaction.

Taking a strategic approach to cost reduction by improving business processes helps the organization identify sustainable cost reductions and avoid across the board cuts that may reduce those expenditures that deliver real value.

About Kepner-Tregoe

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