Not rigorously managing costs could cost you your business. Time to put it top of the agenda

I don’t think anyone has missed the fact that life has become considerably more expensive during the past couple of years. But sometimes it takes an isolated incident to really bring it home. For me, it was the shock of spending ￡8 on a special coffee and a copy of the International New York Times at Heathrow airport last week. ￡8 for a coffee and a paper! Back in my student days in Amsterdam, that would have been enough to live on for two to three days at least.

Rising costs, inflation, supply difficulties and more have all combined to stop our money stretching as far as it used to, and it’s no different for most businesses. Energy and labor have both increased in price, customers are looking for better value, and raising money for growth has become a more onerous task as the cost of borrowing continues to spiral.

All of a sudden, cost management is back on the priority list, and for most of us (including senior executives), it’s not a welcome development. After all, spending money tends to be more fun than scrupulously monitoring and cutting expenses. I remember at one point taking over from a divisional CEO who had spent more than ￡30k on an interior design consultant to “feng shui” the office environment and being horrified by this, then reading about the ex-Merrill Lynch CEO, John Thain, who splashed out?$1405 on a trash can ?as part of a ￡1+ million refurb…

The financial crisis put paid to a lot of the most out-there corporate excess; however another challenge is that few business leaders are able to successfully manage growth and efficiency at the same time. During the pre-inflation years, most were concerned about “what” to execute rather than “how” to do it, and getting things done with minimal resources in the shortest possible time – an approach that one of my mentors, the late?Mark Hurd , turned into an art form – became less popular.

I have always strongly believed in the discipline of getting things done and rigorously managing costs. And in these difficult times, it could be the difference between surviving or going under for many businesses. But how can it be done? Here are my views.?

1. Start with your management team. While I wouldn’t go so far as Gary Hamel, the influential business thinker who promoted the idea of?firing all managers , during my career I have never suffered from a lack of management resource. On the contrary, spans of control are generally too small and would benefit from some?streamlining . For instance, I used to work in a matrix organization where managers in HQ were encouraging more spend to grow the business, while their regional counterparts were doing everything they could to avoid it in the interest of hitting their budgets. I also think it is crucial to reduce the number of management layers between the customer and the CEO. Because your frontline are the key to how you need to be doing business. Which leads me on to…

2. Go to your frontline. This is something I talk about a lot, but I will always maintain that the closer you are to your frontline (and by extension to your customers, and to your sources of revenue), the better you will communicate with them and motivate them. This is where you are going to find the real gold when it comes to the excess costs produced as you engage (or fail to engage) with customers, such as service phone calls, extra engineering support, and replacement materials, just as a few examples. At one telco I worked at, we typically needed between five and six calls between the customer and customer services when new internet packages were being set up, because of a lackluster, unmotivated infrastructure provider. And a customer service agent said to me, “Why are we not calling the customer direct when they buy the service?” By doing this, we turned a horrible experience into a proactive service that convinced customers someone was taking care of them, leading to better net promoter scores and more opportunities for upselling and cross-selling.

3. Find waste. As in, any and all costs that do not add value, wherever they are around the organization. It could be that feng shui consultant, it could be executives’ pet projects. Some I have come across include sponsoring the CEO’s local soccer club, spending heavily on advertising in locations where VPs spend their holidays, or arranging lavish get togethers that include partners of the leadership team at top hotels. Other common sources of overspend include smaller agencies and suppliers that have been appointed without going through your procurement process, or overcharging for services your company does not really need, and bespoke IT applications that have not been acquired by your technology team.?

4. Prioritize, prioritize, prioritize. Believe me, when you have carried out the above steps, you will find yourself with an enormous list of challenges and requirements to overcome. All of these will take time and money to implement, but will bring the biggest cost savings over time. For most executives, that means having to make difficult choices and trade-offs. My advice is that, instead of starting with all the big items, it’s more effective to make a list of all potential cost initiatives, rank them by level of importance to the customer, and start executing the first group regardless of how big a chunk it is.

5. Establish a culture of cost creativity. Finding and implementing cost reduction opportunities should be rewarded and incentivized. I always think about Jan Stenbeck, the founder of Tele2, who established a culture based on a belief that things can always be done better, and that they should be challenged. He turned a steel and forest conglomerate into a telecom and media company that challenged Telia, the incumbent provider in Sweden. And he made it fun. I mean, you have to admire a guy who jumped on the fact that cheap is pronounced?“sheep” ?in Swedish to advertise his products.

6. Focus on “how” rather than “what”. This means challenging leadership to rigorously search for (and seek to beat) cost benchmarks and best practices. Consistently. It might not be exciting… but it works.

To summarize, I have always believed in the power of rigorous cost management. And, right now, I think it’s a strategy most businesses can’t afford to ignore. What are your thoughts?

Photo credit:?Kevin Schneider, Pixabay