Having engaged in more than my fair share of cost reduction initiatives, both as a consultant and an operating executive, I have seen cost reduction initiatives that have had transformative effects on companies, along with those delivered under-delivered on savings but more importantly had negative consequences for the business.
Close to half the companies that pursue cost reduction measures fail to meet their targets. The chart below (borrowed from my prior employer, Deloitte Consulting), perfectly illustrates how savings targets get eroded.
In some cases, a cost reduction initiative can result in major damage to the company as employees fearing for their jobs are demotivated, fail to execute on their current jobs and jump ship, resulting in a downward spiral for the company.
The likelihood of a successful outcome, while no guarantee, can be significantly improved by investing the time upfront setting up the savings initiative and ensuring on-going focus. Specifically:
- Communicate the strategic rationale for the cost savings initiative – Having a strategic rationale to justify the cost exercise helps bring employees along, giving them a reason to believe that at the end of the exercise there will be a stronger company, one that will flourish. This engages the minds and spirit of the entire company. A cost reduction exercise just focused on making more profit will be viewed as for management and shareholders benefit.
- Engage Leadership – Too many savings initiatives are the province of CFOs. For success, leadership across the company has to be engaged. This shows alignment and signifies the importance of the initiative. More importantly, the initiative moves from being just a cost reduction initiative to one that can transform the organization as leaders think more broadly about the opportunities.
- Governance & Tracking – Major initiatives require a formal Project Management Office (PMO) to:
- Provide an integrated view across all initiatives;
- Ensure project plan & implementation discipline;
- Provide regular tracking and reporting;
- Identify synergies or conflicts across seemingly disparate initiatives in different areas
- Provide initiative leads with best practices in developing project plans
The PMO does not need to large or bureaucratic. The PMO we have in place for a current client looking to deliver $75MM in savings represents 1.5 FTEs. The added cost of a PMO is a no-brainer to ensure that savings are more likely to be on plan.
- Open, Regular Communication – A regular cadence of communication needs to be established if everyone in the company is going to be kept engaged. The strategic rationale needs to be re-iterated and progress towards goals should be reported on. And, if difficult decisions on layoffs need to be made, these should be communicated so that those impacted are treated with respect, and those remaining continue to remain engaged. Without communication, people will fill in the void of information with the worst-case scenario.
- Detailed Project Plans – I cannot stress the importance of detailed project plans enough. Detailed implementation plans are required if the initiative is going to stay on track and deliver desired savings. Having milestones is insufficient in a complex initiative. There are too many moving parts and dependencies not to have these clearly thought out before embarking on this initiative.
Enterprise-wide cost reduction initiatives are hard and have a high degree of risk, however over half actually achieve their goals. Done right, this can be a major source of competitive advantage for companies, allowing them to invest in new opportunities that can transform the company.