Five steps to smarter cost cutting

While most businesses are beginning the recovery process after the recent economic turmoil, cost reduction and cost cutting remains a vital business practice

May 10, 2010

By Steven Woods, South African Country President at Compass Management Consulting

While most businesses are beginning the recovery process after the recent economic turmoil, cost reduction and cost cutting remains a vital business practice. The ability to make smart cost cutting decisions that streamline rather than cripple the business is becoming a defining characteristic of the successful modern organisation.

With comprehensive planning and evaluation, most downsizing initiatives do achieve their goal, but in reality, today’s environment is fast-paced and decisions need to be made and implemented quickly. This often leaves little time to scrutinise the finer details, which can lead to bad decision making.

However, with this five step plan it is possible for smarter decisions to be made and put into place quickly, achieving immediate savings, sustainable cost reduction and optimised performance.

Step 1: Baseline

Baselining is an essential first step in any cost reduction initiative. It involves assessing existing operations to determine where you stand and where opportunities may lie for improvements.

This allows organisations to understand and communicate how IT services are delivered to the business and enables an assessment of how and where cost reductions should be apportioned. Baselining involves reviewing personnel and function across various service towers, or aspects of the IT environment, and focusing on costs, productivity and utilisation.

By comparing the various service towers and benchmarking them against top performing organisations of similar size within a similar industry; it is possible to assess the relative efficiency of the entire operation. If for example one service tower performs inefficiently compared to others in the organisation or leading practice, it may be possible to make changes to improve performance and reduce costs without damaging the business.

Baselining should also consider the impact and resources that would be required to downscale. Other hidden costs such as maintenance contracts and equipment that is no longer used also need to be borne in mind as they can indicate areas for cost reduction.

Step 2: Identify quick wins

This step can be conducted while the baselining process is being conducted in order to save time and realise benefits faster. By identifying quick wins and areas for immediate cost savings stakeholders will be more likely to believe in the cost reduction exercise and this will generate more buy-in as well as immediately increase return on investment.

During the baseline assessment it is likely that several areas where gaps in performance can be closed quickly will be identified. Storage is one such example where savings can often be identified and addressed speedily.

In this particular service tower unit, prices for both hardware and software decrease year on year. However, pricing structures often do not fully take these decreases into account, and as a result the prices actually paid for storage hardware, software and services are generally well above market levels. Identifying this problem means organisations can renegotiate purchase agreements or outsourcing contracts to align pricing to the market, generating an immediate and often considerable saving in cost.

Many areas may offer opportunities for quick wins depending on the lifecycle of the organisation and the technology it uses. By conducting a baseline assessment these areas can be addresses and processes restructure to generate immediate bottom line benefits.

Step 3: Quantify and communicate cost reductions

This is another step that can be conducted during the baseline assessment, and is an important one when it comes to making effective cost reduction decisions, as it helps to boost credibility for the initiative and builds an understanding of the consequences of any cost cutting processes.

Businesses need to be able to quantify the results of cost cutting, using a fact-based analysis of the repercussions and results of the cost reductions.

This helps the business to set priorities and make smart, informed judgements about whether or not the reduction in service quality as a result of cost reduction with be acceptable to the organisation or not. Making these decisions based on quantifiable facts is essential since the threshold of acceptability for decline in service levels differs between service areas across the organisation. Smarter decisions in this area will prevent unacceptable, detrimental cost cutting that could irreparably damage the business.

Step 4: Aligning cost reduction with business strategy

The larger business context needs to be considered in conjunction with any cost reduction exercise, because it is vital to understand how changes will impact utilisation and demand for IT resources.

The business strategy can identify areas where it would be unacceptable to cut costs. For example, if an organisation’s strategy is to be the best at customer service it is not possible to cut costs in this area as it would negatively impact levels of the very thing the company prides itself on.

Degradation in this area could prove fatal to the business.

Business efficiency is a vital consideration when it comes to cost reductions. The overall impact on the organisation needs to be considered, and opportunities to improve efficiency rather than reducing service levels should be carefully examined and taken into consideration.

Step 5: Simplify operations

Building on the need to improve business efficiency, reducing the complexity of operations can help organisations to leverage savings without cutting service levels. Organisations often run excessive number of applications, data centres and the like, many of which may be outdate, unused or unneeded.

These can easily be cut without degrading service levels, cutting costs by decreasing volumes on unnecessary tools.

By taking advantage of opportunities to consolidate and streamline operations, organisations can reduce complexity and drive significant cost savings. Taking the other steps into account, businesses can quantify the specific benefits of such a process and define specific timelines for achieving these benefits. Many of the initiatives outlined in this five step process can be self funding and achieved in relatively short time frames, delivering quick bottom line benefits to an organisation.

Realise the benefits, quickly

Cost reduction is a reality, as no business wants to be spending money where it is not necessary. But in order to cut costs successfully, it is necessary to reduce expenditure without crippling essential operations while at the same time balancing the need to take decisive action with the ability to make smart decisions about where costs can realistically be reduced.

By following this five step process, the challenges of making smart cost reduction decisions can be addressed without the need for lengthy planning and evaluation. Each step provides specific requirements, and by conducting several of the steps concurrently it is possible to achieve immediate savings as well as positioning an organisation to deliver sustained cost reduction and optimise performance.