Trim the Fat, Not the Muscle

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Improving operational effectiveness for a competitive advantage

Ian Kane and James McLean discuss how companies doing business in Alberta can improve their operational effectiveness.

In Brief
In Brief
When the economic recovery starts to happen, it could speed up relatively quickly. Companies need to set themselves up right now to be well-positioned for the upturn.

As the Alberta economy remains softer than it was a year ago, companies need to reduce costs and improve their operational effectiveness. A business that takes advantage of this opportunity now will face the upturn lean and fit.

The tendency in a slowdown or recession is to cut operations overhead and slash costs, head into the bunker, and ride out the storm. This is a mistake, according to Ian Kane, a director in PwC's Advisory practice in Calgary. In spite of any short-term relief this approach might offer, the long-term impact to a company's operations can be even more damaging.

"Often what happens in this environment, when you have a downturn, is that people start scurrying in all different directions and become very reactive," he says. "And this reactive environment actually causes more problems and more turbulence."

Companies can weather this period by acting quickly and decisively, and making the hard decisions early on. By aggressively managing costs and eliminating inefficiency within their operations, they can improve overall financial performance and actually gain a competitive advantage. During past economic slowdowns, leading organizations maintained their focus on operational efficiency and large transformations. This has much to do with the importance of keeping cash in their operations as it does without sacrificing the future for short-term savings.

"Operational effectiveness is anything that impacts on the day-to-day operations of the business," explains Karen Watson, a director in the Advisory practice in Edmonton. "There's certainly an opportunity to increase the level of operational effectiveness across industry and government in Alberta."

For most private and public sector organizations, it is possible to trim the fat from operations and get rid of wasteful spending. Successful operations reviews are founded on agility, decisive action and transparency of communication. Taking an inclusive view of finance, information technology, operations and workforce issues will help manage operational costs in a downturn and enact valuable change that will stick for long-term profitability and resilience.

Companies that have seized this opportunity to become leaner and more efficient will be among the first to thrive in both good times and bad. To build a culture of operational effectiveness, here are four steps to consider:

  1. Set an environment for cost reduction
    Confirm the cost-reduction targets and process, agree on the in-scope base, and complete a preliminary reduction analysis. Agree on cost ownership and who's responsible for challenging which costs. Working from a pre-allocation cost basis will prevent any costs from falling through the cracks.
  1. Challenge the financial plan
    Operating managers should clarify cost drivers, challenge operating cost assumptions and reduce discretionary spend.
  1. Look for contract leakage
    A forensic review of suppliers may uncover recoverable claims, cost avoidance areas, and off-contract savings opportunities.
  1. Gauge performance by measuring results
    Do so by monitoring activities, capturing related spend results and producing robust reports for senior management. At the same time, focus on these cost-management and control activities:
    • Rigorously control spending: Immediately establish a tighter span of control for spend approval to begin the transformation to a cost-cutting culture from a spending culture.
    • Stabilize cost controls: Complete a gap analysis of critical cost management and controls to identify immediate actions required to stop the bleeding and create a culture of cost awareness and leadership.

As budgets become tighter and spending is reduced, the opportunity for private companies and the public sector to reduce inefficiencies is important, according to James McLean, a director in the Advisory practice in Alberta. "We definitely view there's an opportunity to both save money and improve service and productivity across the board in Alberta."