Making Cuts Strategically

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Rapid Cost Reduction
In today's economic climate, companies frequently turn to short-term cost reductions. But these cuts are usually put into place without considering their sustainability.

Effective and sustainable cost reduction

In the wake of the current recession, many companies in Alberta are trying to significantly reduce their costs.

Traditionally, organizations can make the mistake of cutting expenses only when they're in trouble. Unfortunately, a short-term cost reduction plan can often leave companies scrambling once the recession ends.

To survive in this environment, companies need to come up with a strategy that combines both rapid and sustainable cost reduction.

Rapid cost reduction

Rapid cost reduction focuses on quickly delivering tangible savings opportunities as well as immediate discretionary and third-party expense reductions. These can include:

  • Reducing non-essential spending. Cut out the costs that are not essential to your business operations. For a company operating in Alberta, these might include ending free room and board for employees, scaling back on above-average salary increases, and limiting spending on travel or social events
  • Reviewing your business from end to end. Eliminate non value-adding activities
  • Delivering rapid cost reduction through more rigid project management. This could include lowering costs through more highly focused teams or by discovering "annualized" savings

Sustainable cost reduction

Meanwhile, sustainable cost reduction focuses on improving and stabilizing the way costs are managed to drive continuous improvement and sustainability. It also creates a cost-conscious culture with governance and management. A solid strategy for sustainable cost reduction includes:

  • Clarifying business cost drivers and improving accountability. Define your operating cost drivers through a "bottom-up" analysis: linking financial plans to operating plans will provide transparency, improve accountability and enable measurement of cost reduction activities
  • Taking control of third-party spend. Make sure you're creating sound agreements and making good decisions with third parties to reduce your overall spending and to improve supply chain leverage. This is especially true when doing business in Alberta because some contracts may have been negotiated at the top of the market. As business has slowed for both parties involved and the cost of both materials and commodities have dropped, these contracts aren't beneficial to either side
  • Tackling your company's cost culture and behaviours. You can only sustain the benefits of cost reduction in a culture that encourages individual responsibility for managing and controlling spending. When the price of oil was at record highs, many Alberta companies approached spending with a "go big or go home" attitude. Now that the economy has cooled, these same companies need to adopt a more realistic approach

Combined, this parallel process of rapid and sustainable cost reduction can not only help companies to seize opportunities in a downturn, but also place them on a good footing for when more prosperous times return.