To prepare your company for the future in times of growing financial pressures and to focus on strategic initiatives, costs must be reviewed in all departments.
As part of our project engagements, we have carried out numerous successful cost initiatives and, through transparency and effective controlling processes, changed the way we provide services in the long term. It was important to us not only to reduce costs in the short term, but also to make the company fit for the increasingly complex tasks in the long term. At the same time, our experience tells us that this topic will not only become even more important in the future, but also more complex and difficult.
Given the erratic and volatile market performance and the acceleration of technological developments, companies face several challenges in optimizing their costs:
It is not just a matter of reducing individual cost items as quickly and effectively as possible, but also of reducing cost groups in their entirety while taking into account the cross dependencies. This requires an overview of the interactions between individual areas and their dynamic calculation.
In this context, it is necessary to identify areas of performance that are strategically important for the company's competitive position and to invest in them systematically. This is a major departure from overall cost-cutting initiatives and represents a shift towards the company's strategic focus.
Corrective mechanisms must be put in place to prevent agreed cost-cutting initiatives from affecting the company's flexibility to respond to new challenges. This must not lead, however, to cost-cutting initiatives being gradually undermined in new ways. Instead, it should help these initiatives to be as effective as possible in their respective core areas.
Finally, while cost allocation plays an important role in implementing appropriate control measures, in many companies it also leads to time-consuming discussions about cost details, especially between the commercial and IT departments. Turning this into a constructive discussion about the right path forward is an important challenge for the future.
Our experience shows that introducing some organizational mechanisms and planning tools can significantly help a company to achieve these goals:
The bundling of the respective technological sub-areas and the identification of their interactions requires a cost matrix that is too complex for most back-of-the-envelope calculations. At the same time, SAP tools tend to be too cumbersome to run simulations. Creating cost models in databases and using them for simulations would therefore be the natural step, which is not yet performed even in large companies. The substantive gain from such interactive models is so high, though, that truly optimized cost structures can be built in conjunction with newer planning and optimization tools.
In fact, the strategic focus on performance areas requires a clear discussion within the company to identify which technologies are core applications and must therefore be at the center of interest. To achieve this, a central project office should define and promote innovation initiatives.
The assumptions behind the cost initiatives should be regularly reviewed over a reasonable period of time in order to address any necessary changes. To avoid jeopardizing the entire cost-cutting initiative, however, the total budget should remain unchanged – unless revenue or profits increase overall and can then fund the budget increase.
Fostering closer links between business and supply technology areas, especially IT, with respect to cost responsibility is actually important for both areas. To prevent decisions that harm the interests of the other area from being taken, the use of common cost- and profitability KPIs can lead to a unified range of objectives for both areas. This notwithstanding, the sales and implementation performance parameters can still be used to identify the individual responsibilities of the respective departments.
- a) There are now a number of new instruments aimed at increasing transparency. It is time to use them to gain a real overview of the needs and interdependencies of business decisions in the individual departments/areas.
- (b) Organizational decision-making and objectives should be put together in such a way as not to continue promoting different interests but to pursue a common goal. At the same time, the individual responsibility of each department for achieving their goals must be preserved.
- c) Finally, the challenges of what is increasingly a VUCA environment (volatile, uncertain, complex, and ambiguous) require increased agility. Assumptions must be constantly reviewed and measures modified to adapt to the changes. This can happen only if there is confidence in the company that all areas are pulling together.