Hi Núria, the first step has to be understand your historical cost base. By month and by category and subcategory of expenditure. Without this, which is frequently neglected, there is no meaningful cost analysis, neither to grow nor to restructure. The expenses need to be structured in such a way that they are relevant for business purposes. Cost-cutting is frequently done in a reverse way, that is instead of saying “cut by 20%” they say “have your CLTV/CAC ratio below 1x” or “have your margin higher than 70%”... therefore it is crucial to know how these metrics have behaved in the past and how each one relates to the rest of business metrics. So unfortunately you need to start very humbly and make sure you understand where you are, and ensure your costs can be understood, net of one offs. Once this is setup, in a desperate scenario you do your cost cutting based on your cash targets. In a less desperate case, you need to benchmark your key metrics against the good competitors and see what level of cost cutting is needed to align them, assuming that some variables such as revenues or pricing can be fixed, and some others like structure costs can be influenced. Something else to bear in mind: all cost-cutting exercises have to have a cost-benefit analysis because there is frequently a price associated to restructuing “I invest 1M to close this department and I will save 0.5M annually so the payback is 2 years” or “Early termination of this contract costs XX but has a saving of YY”. Hope this helps!
I endorse Xavier’s comments and it is such a huge area that we could fill a book not just a page; but one thing for sure is that I would avoid the blanket instruction to “reduce costs by x% across the board. That implies that excess cost is evenly spread across the organisation and that every area will respond similarly to a given reduction in cost base. Most unlikely. In fact what will end up happening is that the really well managed parts of the business get punished and the lazy areas just soak up the reduction with ease which is completely against what you are seeking to achieve. You need to be forensic about all activity and potentially decide to stop doing some things completely and maybe even adding to those areas that would benefit from additional resource. As Xavier says any action has a corresponding reaction and it is easy to do more harm than good by applying a lazy generic cost reduction target. Of course, its harder to be selective but senior executives are paid to do tough and complicated things.
couldn’t agree more with the two previous posts. Just a few further thoughts. First, as already indicated above, one must distinguish between:
1) a liquidity crisis and
2) addressing an unsatisfactory profit margin situation
The first situation requires a focus on cash projection and management. The second allows a more thoughtful focus on the profitability of individual products/teams/divisions.
For the non-HR part of the cost-cutting, an “addressable spend analysis”, carried out with the procurement team, may be useful to determine where you freedom of movement lies. More details on: http://www.vankleef.business/Procurement.html
This is such a complex area, and in my experience very much depends on the objective - as Eduard H above alluded to. Are you attempting to improve bottom line vs. attaining cost leadership vs. prepping to launch a continuous improvement program, and so on? There are other example objectives and whatever yours is may well drive the need for different approaches - withe more details I can be more specific. Behind this, a general pointer: Start with an analysis of where you are compared to best practices (best competitors) and benefit assessments. Then always, always split your approach into 3 phases - Quick wins 90 days, Balanced (6-12months) Transformative (12 m +) as this helps tease out the impacts. ((Change the timelines if you wish to, its not prescriptive)) . Possible examples: Quick Wins give quick results but may impact long term business needs. Transformative will probably require investment, and so on.You can then easily lay them all side by side to measure the +/- effect over a timeline, understand the financial impact, and to get stronger stakeholder buyin and a sense of where to focus first, and what the business can afford to do. . Hope that helps.
Hi, adapt “EN12973 Value Management” and practize it for each product and service. You will be succesful. Regards Fred
A deep business analysis is basic to identify those areas that can be included in the restructuring target and derived reduction impact. But what is fundamental is to set up a solid change management plan, to control the information provided to employees and ensuring business continuity once the restructuring is deployeed
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