Cost Management

Why Cost Cutting Isn’t Just for Crises

Reducing costs and maintaining financial control should be seen as forward-looking growth strategies.
Kristine BrandsFebruary 12, 2013

Business uncertainty continues to pressure global organizations. To be successful in this “new normal” business environment, CFOs must set priorities and continue to focus on the traditional gate-keeping functions of cost reduction and financial controls. But while cost reduction is often a crisis-management response to declining revenues and profitability, it can also be used regularly to strengthen a company’s performance, even when the organization is on par with its cost targets.

Indeed, cost reduction and financial controls were among the top finance priorities identified by the United Kingdom’s Association of Chartered Certified Accountants’s and the Institute of Management Accountants’s (IMA) Finance Leaders Survey in December. The survey, which included CFOs, directors of finance, vice presidents of finance, and finance controllers from 46 countries, is the first in a semiannual series to track how key finance issues are evolving.

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Cost Reduction
During times of global volatility and uncertainty, cost reduction should be a critical part of an organization’s strategy. But it should not be a one-time action. Rather, cost reduction should be based on process-driven efficiency improvements that add value to the organization.

How can you improve a manufacturing or production process and lower cost? By thinking of cost reduction as a proactive rather than a reactive initiative. Looking at multiple objectives lets you link the reductions to an organizational goal. For example, by applying the statistical strategy Six Sigma, which is traditionally used to manage defects in manufacturing, for instance,to the financial areas of a companyto measure and reduce transaction errors, the cost of correcting errors decreases, and the transaction quality improves.

Since the financial crisis of 2008, cost reduction’s low-hanging fruitincluding such moves as head-count reduction, manufacturing downsizing, and outsourcinghas been tapped and probably won’t yield significant additional savings. That means other opportunities need to be identified. One example, strategic sourcing, a procurement process applied to manufacturing purchasing, involves partnering with preferred vendors to achieve favorable pricing, delivery, and quality. It can be applied to procurement of all goods and services, resulting in lower costs, higher reliability, and better purchasing terms.

Other, more popular, cost-reduction plans such as outsourcing shared services may not reap the expected benefits, especially if the outsource provider is in another country. Time-zone differences can severely affect communication with your company. The outsourced provider’s personnel and management may also not be adequately trained to process outsourced activities and resolve errors satisfactorily. Thus, while outsourcing may look good on paper, one needs to beware of hidden costs and management issues.

Other opportunities for cost reduction lie in the adoption of sustainability initiatives. For example, Interface Inc., a global leader in modular carpeting, has focused on a sustainability strategy since 1994. The strategy has helped the company achieve resource-usage reductions, cost reductions, and improved profitability. Interface estimates it has reduced fossil-fuel use by 60% and water use by 62%, while doubling earnings on its $1 billion annual sales since implementing sustainability initiatives.

In terms of research and development efforts, technology companies may find that given development-cycle times, it may be cheaper to buy rather than develop technology.

Cost reductions can also be had in running tax-minimization models. CFOs and other senior executives need to consider when changes occur in tax laws. Corporate tax liabilities, for instance, can be modeled to identify least-cost tax jurisdictions for a firm’s headquarters, manufacturing, and sales, for example.

Financial Control
Financial control is another important part of the CFO’s job, with effective internal control continuing to be a critical issue. But while internal controls can be embedded in one’s enterprise resource planning system (software that enables a firm to integrate a company’s business processes) and continuously monitored for compliance on a real-time basis to minimize adverse effects and the cost of a control breach, for example, effective financial control depends on fast access to critical information and data that organizations collect.

The chief information officer and the CFO must partner to ensure that real-time information is available for decision-making. This includes developing tools that can analyze and report key information such as financial models, dashboards, business intelligence, and customized metrics that track an organization’s performance continuously and accurately.

Effective financial control must also include risk management. Implementing an enterprise risk management system for internal and external risks allows you to reduce and manage financial-control exposures and “surprises.”

Thus, by ensuring cost reduction and financial controls are well managed, CFOs and other senior executives will be freer to focus resources on other critical matters.

Kristine Brands is an assistant professor at Regis University in Colorado Springs, Colorado. She is also a member of the IMA’s (Institute of Management Accountants) global board of directors.