The search for the cost optimisation panacea
Introduction
The recent turbulence in the global economy has put renewed pressure on executive management to drive down company costs. Organisations are preparing themselves for difficult times. KPMG research in The Netherlands and Belgium shows that cost optimisation is dominating corporate agendas. This trend is also visible closer to home; organisations across the Western Cape are integrating cost optimisation initiatives into their 2009 strategic objectives.
Towards the end of 2008, KPMG performed a survey amongst large organisations in the Western Cape, with the aim of identifying their cost optimisation agendas. According to Hilda Mulock Houwer, Head of Markets in Cape Town, interesting findings become visible. “Cost optimisation is a key focus for everyone, it is however about answering the ‘how’-questions. What approach should we follow, where do we focus on and how do we maximise the benefits are questions keeping the organisations busy.”
No preferred cost optimisation approach
When asked what approach management follows, not a single preferred approach arises. On the axis of a rigid (top down) versus an incremental (bottom up) organisations differ their approaches and often work on a combination of approaches (30%). The top down approach is followed by 29% percent of the organisations, whereas a complete bottom up approach is preferred by 30% of the survey respondents. Remarkable is the high percentage (29%) of organisations opting for a combination of approaches; it is clear that no best practice approach identified.
Short term focus yet strategically aligned
Closer analysis of the various initiatives shows that most initiatives focus primarily on short term objectives. As pressure increases from executive management, line managers tend to concentrate on cost savings that are readily achievable in the short term without taking the long term agenda and impact into account. These short term initiatives include the realisation of cost savings in the procurement space (85%), process optimisation (80%), supply chain optimisation (55%) and cash management (55%). The investment in long term strategic objectives such as shared services and new technologies are not considered widely as possible cost reduction initiatives. The lack of excess cash and increased difficulty in obtaining additional credit may prevent organisations from opting for long term strategic initiatives that usually require initial capital investment. However, the survey does not indicate that organisations are moving into blind panic as the revenue side of the business continues to receive attention. All participants have explored, or are exploring, options to increase revenue in 2009; this can be seen as a part of a balanced organisational strategy.
In our opinion, short and long term cost optimisation initiatives should be explored in parallel, as part of an optimal strategy to address the challenging economic climate. Organisations still need to focus on short term benefits in order to obtain acceptance from all their stakeholders, but not at the expense of a strategic, long term cost optimisation agenda preventing the development of sub-optimal solutions.
Gap between expected and realised cost savings
The survey reveals that three quarters of Western Cape based organisations only realise 80% of their intended cost savings, which is in line with international KPMG research. This outcome suggests room for improvement. How do we explain the gap between initial expectations and the actual realisation?
The cause cannot be the management focus and commitment as all participants define this as a critical success factor. Also, 70% of the organisations mention the monitoring and adjustment of results as a success factor. It is, in our belief, that some critical success factors are not seen as key. This includes factors like communication to employees (35%), the use of innovative ideas (10%) and clear roles and responsibilities (25%). A clear understanding of the case for change, the interdependencies between the various departments and a true understanding of the cost drivers is crucial. Too often, these elements are ignored.
Cost optimisation – what’s next?
In conclusion, KPMG sees organisations moving beyond the point of plans and actually acting in a way that is required in the current economical tide. At the same time, the answers in terms of approach, portfolio and maximising the benefits are not on the table. The search for the cost optimisation panacea continuous.
Positioning the survey findings on a macro level, Hilda Mulock Houwer says: “A vicious circle has been created. Cost reduction programmes include staff redundancies and cut-back on procurement. Markets continue to be significantly impacted by the sharp reduction in consumer spending, a direct effect of staff redundancy policies. And ultimately, these consumer cut backs create further job losses. The golden question still remains: will lower fuel prices, interest rate cuts and lower inflation be enough to halt this snow ball effect into the foreseeable future?”
