We continue to live in uncertain times, with COVID refusing to go away, inflation on the horizon, and Doja Cat at the top of the Billboard album chart. Many of us need to make critical cost and value decisions in an uncertain environment: some of you are planning for the 2022 business climate, others are trying to close out 2021 on a good note. When you start reducing costs, you need a plan that articulates your business strategy. Otherwise, you risk making changes to areas of your business you are counting on to drive future growth and cash flow.
I’ve written before about capabilities (the building blocks of your business) being the foundation of any company’s plan. Differentiating capabilities distinguish you in the eyes of your customers. They are the very foundation of a company's plan. On the whole, these are things you invest in (people, process, and technology) to drive revenue, customer satisfaction, or employee retention. Non-differentiated capabilities simply provide needed support and are more typically measured in terms of capacity, cost, and quality (e.g., how much and how good do I need it to be to support my business?).
Well-managed companies continually review cost and value opportunities, and they look to find investment capital hidden in low-value-added spend. What is low-value-added spend? It's different for every company, but generally, it does not support your current business objectives. For operating spending, perhaps your plan has changed. For project spend, perhaps the need for the project has changed. I've assisted clients with evaluating their project portfolios for this alignment test. We used to assign one of four categories to an investment:
- Transform the business
- Grow the business
- Run the business
- Risk/regulatory requirements
Low-value-added spend is typically found in the "run" and "risk" categories. The goal with my clients was to reallocate the investment mix and fund transformational opportunities by pulling cost out of “run” activities that are non-differentiating (e.g., add more data storage capacity). When you look at most outsourcing transactions or cloud computing migrations, what you are seeing is that companies repurpose investment away from in-house, non-differentiated "run" spending to areas where it can be better leveraged (or into the owner’s pocket).
Good decisions on cost management start with a question like this one: "Where do I have an opportunity to repurpose low-value-added spending?"
One other concept I like to review: the balanced scorecard. The scorecard concept says you have to invest in four key components -- financials, operations, customers, and employees -- to align what you do every day to your business strategy.
Each of these domains can have "transform," "grow," "run," and "risk" category spend; the key is to focus first on the "run." As you determine where you need to trim, see if you unintentionally impair "transform" or "grow" in one or more of these domains to improve the Financial domain. In my experience, sustained Financial success is a result of doing the other three things well. I’ll talk more about that next week.
Have a comment or question about managing costs? Email and let me know.