Commitment to a sustainable discipline starts at the top and engages employees with effective communication, data and metrics, and properly aligned incentives
Friday, August 9, 2019
By Vafa Vahid
For good reason, “cost reduction” has become a dreaded term in the corporate world. Most often, when faced with subpar financial performance, the first resort for many organizations is to issue a decree to reduce costs without understanding how this reduction impacts their customers, revenue, operations and employee morale.
Typically, cost reductions are people focused, and what ensues is a short-term improvement in costs, followed with the same expenses slowly finding their way back into the firm. In essence, the organization has put in place a short lived “cost reduction” program, not a sustainable “expense management” discipline.
On the other hand, there are organizations where an expense management discipline runs deep through the corporate DNA. These companies not only focus on their people costs through analysis including spans & layers, organizational “shape” and other headcount-related views; they also focus on the cost of their non-compensation, supply- and demand-driven expenses. Their focus is on sustainable cost savings through a comprehensive expense management discipline, and not one-time cost reductions.
Expense management must be viewed as a functional capability which ensures the firm is operating efficiently and paying the most competitive price for necessary goods and services. Furthermore, this discipline should be aligned with the business goals of the organization, including managing demand drivers. For example, is the intent to be a low-cost provider, or to provide exceptional customer service? Having this understanding will give insight on how to align spend and manage cost drivers across the enterprise.
People, Process and Technology
At its core, we view expense discipline as an attribute of the firm's corporate culture, which is defined by the senior leadership. As such, the first requirement for a successful expense management capability is the complete buy-in and commitment from senior management. Creating and sustaining expense discipline requires a level of discipline, accountability and commitment that, unless fully supported by senior management, will be hard to implement.
While the exact nature of an expense management capability can and does differ from one organization to another, the one constant has to be management's demonstrated commitment to its importance. Management has to set the tone, not only by properly communicating to the organization, but, more importantly, practicing expense discipline in business-as-usual activities.
Once management has committed to institutionalizing an expense discipline, similar to any other organizational capability, its initiation and subsequent implementation needs to be done with a focus on people, process and technology. At the center of any firm's culture - and its key stakeholders - are the people.
Employees need to understand that an expense management discipline, where quality and customer satisfaction are balanced against costs, is an ongoing priority of the firm. Much too often, employees see costs as what “management” controls, and cost reductions as a benefit that will be taken away from them. The paradigm has to shift to where they see the company's cost similar to their own personal expenses and exercise the same level of discretion. They need to own it, manage it, and be rewarded for managing it well. All incentives must be aligned.
Analytics and Intelligence
Once the employees are on board, they need to be supported by the proper policies and processes which enable a culture of expense management. Key to this enablement is the organization's ability to provide the employees with the data and metrics that shed light on the attributes of costs. What are the drivers of demand for each expense item? Who are the providers of services and products that the organization consumes? Which activities account for what costs and why? Which products and clients consumes what costs and why?
From simply understanding the spectrum of one's suppliers, to putting in place sophisticated product and client profitability models, business intelligence empowers people to make educated decisions. These well-informed decisions will then need to be complemented with proper governance and policies that can ensure sustainability.
Last, but certainly not least, the processes and policies that enable an expense management discipline need to be supported by technologies that ensure ease of use, flexibility and sustainability. The technology needs to be able to ingest, process, analyze and ultimately provide the business intelligence to make informed decisions.
We have seen varying levels of success in implementing expense management as an ongoing discipline. Interestingly the firms with most success, whether a global bank or a small healthcare provider, share the same characteristics: The effort has the unwavering support of the management; it is institutionalized through proper communication, assignment of accountability and incentivization of people; and it is complemented by processes, policies and business intelligence that enable the collective stakeholders in the firm to manage and sustain it going forward. These firms have been able to reduce their cost by ~30% and sustain it through continuous monitoring and management.