Achieving sustainable cost reduction
A number of economic factors are pressuring companies to reduce costs including shrinking margins, rapidly changing business models, and inadequate acquisition strategies. Companies are responding by reducing headcount, SG&A spend, and operating expenses. Frequently, companies turn to short-term cost cutting and/or place big bets on premature efforts to transform the business.
The first element to reduce cost is to understand what money is being spent and why, as well as how much something should cost. Knowing what something "should cost" is achieved by having a clear vision into cost drivers and establishing sound linkages between operating and financial plans and budgets.
Specific areas of focus are major contracts (including aging outsourcing arrangements), procurement, and IT.The second element is mandating change in the way money is spent and creating a culture of cost consciousness to promote further sustainable cost reductions. Improving cost management and control processes is essential to changing the way money is spent.Companies that address these elements realize substantial tangible operating and discretionary cost savings. They also benefit from clarity of cost drivers, financial discipline, immediate cost control stabilization, and reduction of waste.