4 Steps To Execute Effective Cost Management

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It’s not unusual for companies to struggle with Cost Management. There are lessons we can all learn on how to do it better – and by “better” I mean enacting sustainable change. Here are examples of three traditional approaches that often fail to achieve the objective of sustainable cost improvement:

Top down – “Top down” efforts are good at identifying where the large opportunities are, but they are challenged by a real understanding of the management decisions that drive cost. They often focus on a “silver bullet” (think outsourcing) without a real understanding of how the organization delivers value to customers or changing behaviors.

Slash and burn – Business as usual, but less costly (e.g. do everything you’ve always done but for 10% less). These efforts tend to be reactive and more focused on survival than building a framework for sustainable improvement. They also tend to be hard on morale across the board because even high-value producing activities are targeted.

Boil the ocean – A detailed analysis of everything, these projects often bog down under their own weight. It seems like a good idea, but this approach often ignores time constraints and the notion of quick wins, and also requires greater investment up front. One other observation, because a detailed analysis of everything requires detailed scrutiny, it tends to become soloed and can miss the cross-company opportunities.

Four Steps To Navigate Sustainable Cost Improvement

  1. Focus onhow to generate tangible savings. Yes, that will usually be a top-down exercise. Dive into the detail for those activities only and ensure you set a goal for how-much and by when
  2. Focus on quick winsbecause often they can fund the investment you need to generate more sustainable cost savings
  3. Create a measurement systemthat identifies what you want not just what you don’t want. The value of that measurement system will extend way beyond the scope of a cost management initiative
  4. Create ownership of value-producing activities.By doing so, these individuals will understand their role in making improvements sustainable as opposed to a once-every-so-often cost reduction exercise.

The COVID-19 crisis is forcing us to respond, and many of us are looking at our cost structures as a way to align the cost of our operations with an unpredictable revenue forecast, but I’ve heard from many of you who have said “we should have been doing this anyway.” If that’s true, then regardless of what it takes to make it through this year, it’s possible that we will emerge stronger and more competitive. For many of us, that would be a real win in a year we are all wondering how to make sense of.

COVID LOAN UPDATE

Note that the PPP loan application period which was set to expire on June 30th was extended to August 8th. About $130 billion of the $670 billion set aside for the PPP program remains unclaimed. If you’re self-employed, there are now fintech lenders like Kabbage who have a process that is tailored to your situation (e.g. your income comes from Schedule C versus a W-2) and can get you approved within a few days. There’s an EZ loan forgiveness application you may be able to use that can make it easier to turn your loan into a grant. Don’t forget that until we learn otherwise, IRS has said that the expenses funded by PPP (payroll, utilizes, etc.) are not deductible, so figure that into your 2020 tax calculations.