More for Less: How to Strategically Reduce Costs

By Michael Vullings
Updated 05 Jan, 2024 12:30pm AEST

The cost reduction imperative

There can be a variety of reasons, both internal and market-driven, as to why organisations need to ‘tighten their belt’ and search for savings. Many organisations are experiencing increasingly challenging economic conditions, rising input costs, and margin pressures in 2023, which means costs will remain at the forefront of most leadership agendas.

For many organisations with considerable headroom for improvement, the first 5-10% of cost efficiencies are usually relatively easy to obtain. Initial savings are usually ‘low-hanging fruit’ – these are usually savings obtained from well-understood sources of waste or inefficiency, and are readily identified and actioned by line management.

However, as organisations stretch their ambitions and start to approach the boundaries of their industry’s cost-curve, it can become increasingly difficult to find and implement cost reductions. Initiatives are also more likely to involve trade-offs and risks. This is where adopting a more strategic approach to cost reduction, carefully assessing opportunities, and utilising experts can really help.

Seizing savings opportunities

Common methods for reducing cost can include Budget Targets, Lean Management, Zero Base Budgeting, and Continuous Improvement. These methods can support cost reduction efforts, however, it is rare that any one method will provide an effective solution on its own and organisations should take a holistic approach for evaluating costs and implementing cuts.

Organisations that take a more strategic approach to cost reduction can achieve a significant in year return on time and resources. Results will vary from organisation to organisation, however typical impacts across relevant areas of opportunity are outlined below.

Tailoring the approach to reducing costs

A tailored cost reduction program will typically follow three stages:

1. Cost Diagnostic. The starting point for a cost reduction program is a robust diagnosis of the company’s costs. This process leads to a comprehensive identification and prioritisation of savings opportunities, and guides the feasibility and overall impact of reductions. A robust diagnostic should consider multiple lenses, including:

1. 1. 1. Financial analysis of the P&L, Balance Sheet, overall cost position and key drivers.
         
      2. Assessment of cross-functional opportunities along the end-to-end process.
         
      3. Analysis of leading practices and benchmarks to highlight further savings opportunities.

2. Rapid Cost Take Out. Execution of cost reduction initiatives should initially focus on the highest impact and highest feasibility opportunities. Early efforts should focus on building momentum for larger and more transformative initiatives. Additionally, as early initiatives are implemented, it is important to put in place the governance to manage and track the portfolio of cost-reduction opportunities. This should include regular meetings to drive program activity and decision-making, and reporting that provides visibility into progress.

3. Cost Governance. As savings accumulate due to early successes, the third stage of an effective cost reduction program is to embed the program into the organisation. This usually involves formalising cross functional cost categories, identifying leaders to take responsibility of cost categories, and putting in place the systems and processes (including targets and incentives) to realise the full extent of the organisation’s savings ambitions.

When exploring cost reduction opportunities, developing a tailored cost reduction program based on robust analysis is essential if an organisation is to achieve sizeable results and avoid making costly mistakes. When evaluating costs within the organisation, combining both top-down and analytical (benchmarking) approaches can lead to a much broader opportunity set; this not only enables the organisation to achieve a greater level of savings, but allows for more intelligent decisions about the trade-offs and risks associated with cost management decisions.

When it comes to cost reduction programs, there is no one-size-fits all approach, and effective programs are always tailored to the unique situation and context of the organisation. 

If you are looking for expert support in reducing cost, please get in touch.