Strategic cost control in Pandemic times , without killing business initiatives

What is the first thought you have when you see the above topic which I am going to discuss with you? Sounds confusing? How is it possible to have cost control yet have business initiatives and without the operations getting hurt? You are not alone if you believe so. 

I have handled cost control as a champion thrice in my career. Twice I succeeded, and once I had failed. Therefore, I exactly understand why, when, how strategic cost control succeeds and fails. 

Why сost control in the current financial times has become so important? One key reason is that you can do it internally and are not dependent on external factors, unlike revenue generation. In current times, when every dollar saved is every dollar earned, and every dollar earned is dollar multiplied, controlling costs is a necessity.

So, what is one most critical requirement for this most difficult and perhaps confusing exercise? It is a change in mindset. Change is scary, change can be testing. We all prefer the status quo to entering into unchartered waters.

“Many people know what they need to do to improve their health, but few behave accordingly. 90 % want to change, but 25 % ever do anything about it.”

Are you willing to have a mindset change? Are you willing to have a paradigm shift in your mindset? and Are you willing to accept that strategic cost control can be achieved? 

The Myths Surrounding Cost Control:

• Operations will get hurt.
• It will demotivate employees.
• It will block the progress. 
• Above all, CFO who is driving the cost control is a negative person and with him at the helm of the affairs, this cannot be achieved. 
• “It is a concept and concepts do not work in the practical world‘’. 

I do not buy any of these myths. 

Cost control, Cost reduction, Austerity:

Cost control is managing costs with a view to revival and ensuring the progress of the group. Austerity is done with an intent to ensure survival and is usually one-off exercise and faces very stiff challenges. Cost Control and Cost Reduction at some places have the same interpretation, though cost reduction is generally a reduction in per unit, while cost control is managing the cost considering the industry norms and practices. 

False Economies in Tight Budgets / Don’t cut your way to growth:

At times, over-enthusiastic leaders in their endeavors to bring down the cost, take decisions, which can reduce costs in the short term, but impact the business in the medium to long term. Such leaders may go for an accountant instead of a qualified professional finance manager to save costs, least realizing that such a decision is impacting the business at the expense of a short term saving. You need to avoid such decisions.

In strategic cost control, you have to trim down the fat, but you do not go and cut bones and muscles. Such a step of cutting the bones and muscles is bound to prove catastrophic. 

Cost Control Process:

Generally, it is a one-off exercise, with the creation of a core committee with a few champions (right number of champions is three- CFO/Procurement head/ GM ).

My costs have to be in alignment with what my profit and loss account can afford. Every item in profit and loss account needs to be assessed to see if it is needed or not, in line with what my profit and loss account can afford- these can be the cost of sales, direct cost, indirect cost, the variable cost, fixed cost.

Case study of an Organization which could achieve successful strategic cost control:

The group was into manufacturing and contracting with many manufacturing and batching plants. With the financial meltdown, Group’s financial health had taken a significant nosedive. When the CFO presented the Business plan to the Board, the founding Chairman rejected the Business plan as the plan showed significant losses for the next year. Unfortunately, that is what the CFO, CEO, GM felt but the Chairman was not interested to listen further. It was “shape in or ship out.” 

What do you think, the three executives would have done? Did they find the founding chairman very unreasonable? Did they give up? Did they go back to the drawing board and picked up the challenge thrown at them?

They decided to fight it out for the group they loved. This was easier said than done. They started calling themselves a “Core team”. The core team decided to look at, as a first step, at every item of the profit and loss account - Value engineering at the cost of sales level, employment cost, and other overheads. The team knew it would not be easy and would need a total mindset change. They were not sure if their co-employees would listen to them, or would embrace the change.

Operational cost reduction: The core team identified that the per-unit current budgeted cost was USD 37 per unit. They considered a reduction Of USD 4 per unit.

The team took the following key actions:

•  Diesel optimization, Merging of departments, removal of generators, single shift to run plants, generator off hiring, 

Value engineering at Cost of Sales level: This is one area, where bringing costs is indeed a big challenge and if CFO has to drive it, it is incumbent that CFO understands the business nuances well to be able to drive the cost reduction at this level.

The team took the following key actions: 

• Aggregate cost reduction with cost optimization and cost substitution. 
• Raw material supplier’s payment terms negotiated with the various suppliers. 
• Successfully implemented sole supply agreements for their main raw material, which resulted in savings. It involved a lot many discussions and negotiations with the suppliers. 

Administration Cost Controls: 

The team took the following key actions:

Closure of some lease renewals, key controls on business and other expenses. 

Employment cost controls:

This was perhaps one of the most unpleasant tasks the team did, as it was pertaining to the employees. It needed convincing the employees for a mindset change. Performers were kept, non-performers were asked to go. Also, some people were moved to the central team, some were moved to different locations. 

Overall Results of the implemented cost control:

1. Board agreed to the new business plan.
2. New cost dynamics could be established in the business.
3. Brought team members together.
4. There was a perceptible mindset change.
5. Increased efficiency.
6. Group was better prepared to face any further financial meltdown.

Why do Cost Controls fail?

Cost controls fail simply because there is no genuine intent and will power to do. There are the following reasons why this exercise fails:

1. Lack of focus - no measurable targets are fixed, monitored and mentored.
2. Complete support from the ownership missing.
3. Lack of persistence and inept decision making.
4. The anticipation of quick results- Which results are there as of yesterday.
5. Too much emphasis on achieving consensus, and trying to make everyone happy. 
6. Lack of support from key internal stakeholders. 
7. Wrong selection of champions and core team members. 
8. Cost control is not time-bound and is done in fits and starts, in piecemeal.

I will be happy to know if you feel more confident now, and that strategic cost control can be achieved without killing business initiatives and operations. Hopefully, you are in the position to do so when you go back to your works.

Remember: It is not the strongest of the species that survive, nor the most intelligent. It is the one that is most adaptable to change.