18 June 2008 Andrew Wileman
Tough cost cultures help companies survive difficult times. As consultant Andrew Wileman explains, leadership is the key.
Strong leadership is a prerequisite for good cost management. Cost leadership starts with the CEO or business unit head and cascades down through the top management team. They need to build a tough cost culture and be good role models in their personal behavior. They also need two key staff functions to be very active supporters of cost control – finance and HR.
Imprinting a tough attitude to cost right down through the organisation takes true grit. It takes a Rooster Cogburn CEO.
A CHALLENGING BASE CASE
Your base case position, what you expect in terms of cost trend, will be a big contributor to the cost outcome.
For example, you could start off the annual budget process by telling your business unit heads that this is a year of prudent consolidation, that they should plan on no headcount additions but a 3%–4% increase in cost per head plus some small reductions in bought-in costs, and with that cost base they should be able to manage some modest revenue growth.
Or, with revenue growth looking difficult this year, you could push to see 5% productivity gains, with headcount brought down 5%, without reduction in the revenue plan.
Those are two very different base case positions. Under the first scenario, management gets the message they can relax a little, tread water and put off nasty decisions. Under the second, their feet are being held to the fire. There’s no standing still. If they’re not growing revenue they’d better be cutting costs – either way, the base case position is that you expect 5% (or whatever percentage works) productivity growth, every year. If you do not stay paranoid and moving forward, your competitors will overtake you.
Once this kind of base case behavior is established, managers will stop coming to budget reviews with a business-as-usual, status quo budget. They will know it won’t survive one minute in the CEO review. The whole tone of the business will have changed.
In a house renovation, builders find out fast if you’re a soft touch. At the end of the first week they may put in for an extra $10,000 because you’ve altered the handles on the cupboards and obviously that’s changed the whole project. Roll over on that and you are looking at a $50,000 overspend by the end of the month. But if your base case is firm, you can stop cost escalation.
As a strong cost leader, your base case expectation must be for real productivity gains and other unit cost reductions every year. Repeat that message and stick by it, until it is taken as a given by your management team and pushed down by them to the rest of the organisation.
To drive down cost you need clear accountability and good reporting. When your management team is sitting round the table, you need to be able to attach specific cost targets to individual names in such a way that those individuals really control the outcome. And there must be the possibility of tracking results in the same way.
Individual accountability is not the same as shared or group accountability. Individual accountability is much better.
Say you are CEO of a traditional phone company, with a mix of declining fixed-line and growing mobile business. Overall, revenue and profits are heading down. Cost needs cutting and you have got a good list of ideas.
But your top management structure is a matrix of heads of customer segments (like home, small business, large corporate) and heads of line functions (like customer service, network operations, marketing). Organising around customer segments was a hot idea a few years ago. It seemed to work well in a brighter, growing market when the matrix complexities were managed in a good team spirit.
However, in a tougher cost-control environment the matrix team approach does not work. Every cost initiative you come up with ends up having three or four names tagged to it as ‘responsible’. When you review progress at the next management meeting, it’s not clear who should be reporting on it or who gets shouted at for lack of progress. It’s not even very obvious what data you are tracking to follow progress. When the progress is not there everybody looks at everybody else. None of the three or four managers really feels responsible.
For tough cost management you have to have single primary accountability. One person takes on the targets and reports on the results. Those targets and results are treated as being primarily under that person’s control.
If you need to break up old management accounts formats to achieve this, then do so. For example, in the past, the head of engineering may have reported on the full cost of engineering including facilities. But under an aggressive cost-reduction programme the reality is that finance controls facility decisions and outcomes.
So while you are in tough cost management mode, finance reports on facilities cost and engineering reports only on headcount and headcount-related cost. The conversations are clear, short and effective.
There are so many problems when this approach is not taken. Companies organised for growth and innovation have to move into a colder era of cost management. The collegiate approach that served them well in the past becomes a liability.
Cost control is a pretty thankless and unattractive activity and people will dodge tough decisions if they can. Team accountability only makes ducking and delaying easier.