Manage your cost base

The economic downturn will force companies to re-evaluate the relationship between cost and profits. Although some have been doing this for a while, many others will be responding late in the day. Few manage to reduce their cost base in a long-term sustainable fashion whilst successfully maximising profitability.

In recent years, inefficiencies have been tolerated and unnecessary complexities have been built into the way organisations conduct business. For some, the competitive landscape has changed so fundamentally that the previous business model will no longer be appropriate and significant change is required.

In an economic downturn, the emphasis must be on:

  • enhancing operational performance and driving profits through improving efficiency and driving out waste;
  • improving planning and execution;
  • stemming value leakage;
  • simplifying and improving end-to-end business processes; and
  • improving the overall cost control environment and creating a cost culture.

As companies grow, there invariably will be changes in operational processes, procedures and systems. With this in mind, it is important that organisations have a risk reporting system that is able to immediately highlight changes in business risks and breakdowns in key controls (e.g. lack of reconciliations, management override of controls, poor cash flow forecasting).

The challenge is to drive profits through the targeted reduction of costs without damaging the long-term health of the business.

What questions should I ask myself?

Cost of supply
  • Is the business making and buying the right things?
  • Am I putting its skills and competitive advantages in the right place?
  • Is the company eliminating waste?
  • Are the operations completely aligned to the end consumer?
  • Can we employ smarter procurement techniques?
Value creation
  • Does management understand where value is being created or destroyed?
  • Is there a direct attribution of cost to products? What is the true net product profitability?
  • What profits are my activities generating and where am I wasting money?
Business structures
  • How is the company organised to supply to the customer at the lowest cost?
  • How much is spent on business support? Is this appropriate?
  • How much overhead creates value and how much is just overhead?
  • Would it be cost effective to move transactional activity to shared service centres or to outsource it?
Managing people costs
  • Are my people in the right place at the right time to maximise profit and minimise waste?
Cost culture
  • How do you take value-added cost out and keep it out?
  • Are the business processes and practices aligned to keeping costs out?
How can we help?

Businesses that are successful in managing their costs understand their cost base, invest in the areas that are central to the achievement of their business strategy and continuously plan, monitor and revise their cost strategy.

PwC has dedicated expertise and a strong track record of helping clients manage costs and reduce complexity whilst ensuring the benefits are sustainable over the longer term.