To date organisations have been more comfortable using slash-and-burn techniques that synchronise boom and bust cycles with short-term fixes to meet shareholder expectations rather than solutions that could deliver more sustainable savings.
One method often used to this longer-term view is structural change, but it’s costly, complex and more importantly any savings may be on the distant horizon. Structural change techniques can release sizable savings but our issues lie with the fact that these programmes are extremely complex, they disengage the workforce, carry operational risk and require heavy upfront investments that lead you to often ask ‘where did our savings disappear?’ and can fail to address behavioural aspects. As a result, leaders often return to their old ways if the underlying behavioural weaknesses such as the following have not been addressed:
If executed well, structural change does have its place in the transformation journey. However, we believe in placing the initial focus on getting the simple things right, that set the foundations for sustainable cost transformation. But simple doesn’t mean easy, if it were, companies would’ve tackled this already. This technique is likened to ‘key-hole’ as opposed to ‘open-heart’ surgery; you have to penetrate deep and it can be painful because it goes to the very heart of a company; meaning the behaviour of leaders when faced with having to make sacrifices for the good of the enterprise.
Why is this not easy? Because these fundamentals often lie beyond any individual director’s control, they find themselves being asked to work collective miracles against the unyielding backdrop of complex matrix structures, unclear accountabilities, functional boundaries, a lack of visibility and rigid company policies. The proliferation of home-grown barriers to change often positions cost-transformation in the too hard category – “I’m not paid to do this”.
Delivering and then sustaining significant cost reduction and redeployment of resources does not require pioneering thought-leadership, or even a big-bang restructuring event. It requires access to experienced specialists in corporate re-organisations and, in-house, a sincere willingness to change behaviours across the organisation.
This is not a proposal to embark on a widespread series of leadership coaching, as the outcomes can be variable and very hard to detect; we are talking about outcome-driven behavioural change to create commercial and cost-conscious leaders. The corporate culture should be underpinned by-self regulation and a series of simple actions and measures from the top that everyone in the company understands. This defines the commercial heartbeat and a lean, agile way of working that embraces ‘enterprise 1st behaviours’.
An organisation must set its cost base year on year so that it is flexible and operating at the ‘must-cost threshold’ (the baseline) to enable survival in both boom as well as bust cycles. This baseline trajectory for operating and capital expenditure is set and carved in stone by the CFO and requires company-wide executive alignment and may only be collectively challenged if there is a significant, event-driven, change in circumstances.
Let’s be honest, cost transformation is not enjoyable for leaders to implement. People don’t come to work to purposely inflict disappointment and stress on their teams. So how do leaders with good intentions build enough desire, resilience and courage to put their career trajectory at risk by tackling something so painstakingly hard? Well, some won’t; these will be the game-players, but the majority will if you provide the right environment for them to do – process should not be used as a proxy for leadership.
You must first make the senior and middle management accountable; they must own the successful outcome of any cultural shift. It must not been seen as an executive team problem only. But to achieve this, there must be a credible imperative to act based on affordability now and in the future. There must also be a rapid drive for simplifying the accountability for expenditure that goes across boundaries with mandates to tackle the ‘seams’ and ‘shadow organisations’.
This must also be seen as a new way of life, not a single change event. Whilst it is important that cost-reduction actions have a clear beginning, middle and an end, behavioural changes must survive that finite programme and beyond. This requires equipping your leaders to sharpen focus and build their resilience and moving them to a place where they acknowledge that there will be a constrained operating-cost environment underpinned by enterprise 1st behaviours.
Reward leaders when they demonstrate a willingness to give something up – you must create an environment where sacrificing something dear to you or your team for the good of the company must be deemed ‘good’ and should be recognised by your peers. Celebrating success by winning a decision that is not in the best interests of the company is ‘bad’ and this should also be recognised by your peers. Herein lies self-regulation.
Instil an incentive for honesty and integrity in the annual budget process. Cut through the behaviours, set an amnesty and ask for a 10% universal reduction; items that are often earmarked as ‘nice-to-haves’ or contingency should be stripped out.
Build capability in your leaders to address hard choices with an underlying commercial nous, rather than defensive behaviours. Remove silo sentiment from the prioritisation processes by setting company-wide criteria and governance that are aligned to business strategy. Recognise those who are more willing to sacrifice so they do not feel they are ‘losers over winners’.
Make change happen by encouraging agile operations through a series of simple actions. There are only 3 ways to truly cut costs; stop doing things (operational effectiveness); lower the quality of service; or do more for less (operational efficiency). Functions and businesses should challenge each other to gauge whether services and their costs are still required or whether internal process service-levels are unnecessarily high.
Elevate a leadership edge that encourages everyone to openly challenge waste and duplication. The workforce often have this in place for unsafe practices (but who challenges one’s excessive spend or poor use of company money?). Make your managers think and act like owners when they incur costs.
Ensure that business units are accountable for the back-office services which they consume and that these are priced so that rational choices can be made by these internal “consumers”. These mechanisms need to be set up in a way that is transparent, has buy-in and does not in itself generate high volumes of zero-sum internal recharges. Lessons learned from experience can be very helpful in getting this right.
Establish Internal currencies that allow leaders to prioritise and challenge each other, for example £5m spend = 4,000 new customers, is your spend truly worth the efforts to secure 4000 new customers?
In summary, the cost transformation approaches described lead to impressive returns on investment because they result in behaviours that galvanise leaders in collaborative, sustainable action. This behavioural change has truly landed when a simple language supported by internal currencies define the underlying imperative to act that is credible and understood by all. These behaviours then become the company’s behavioural drum beat for budget holder decision making, their aspiration to become more commercially astute, and their acceptance of challenge to processes, such that cost transformation becomes the new way of business life.
Jason Box is the founding director of Cost Transformation Limited and can be contacted at http://www.costtransformation.com or Jason.email@example.com