Five questions the C-suite should ask before running a cost reduction exercise.

Organisations in all sectors are being impacted by rising costs, economic volatility, and recruitment and retention difficulties. They are under increasing pressure to not only deliver results, but to cut costs.

We have undertaken numerous cost-saving driven initiatives for our clients, and – if we may blow our own trumpets for a second – many are now viewed as exemplary in their respective sectors.

Reflecting on this experience, we compiled the top five questions the C-Suite needs to ask before they can be comfortable with any proposed cost reduction programme.

1. What proportion of the cost reduction programme is reliant on short-term budget cuts that don’t involve changing anything?

There is a tendency for organisations to go for the low hanging fruit, such as cutting costs across discretionary spend, recruitment, contractors, and even workforce reductions. However, according to Gartner*, only 11% of organisations can sustain cost cuts over a three-year period. This is largely because these measures are a short-term cash flow fix as opposed to a sustainable cost reduction strategy.

Additional sanity questions to explore:

  • What procedures/governance is in place to stop these ‘cost savings’ reappearing?
  • When does ‘changing our ways of working’ need to start in order to ‘save costs’? (This will need to take account of any lag in cost saving realisation due to the need to effect the change)?
2. How do the proposed cost savings impact the organisational capabilities required to deliver the strategic goals?

Far too often the drive for cost savings can lead to inadvertent adverse impact on the organisations capabilities to deliver their strategy. This can be because there is a lack of real understanding of the combined capabilities required to deliver a target performance level, or because cost savings are looked at in isolation.

For example, one organisation we worked with had distributed its targets between the different departments. The IT department cut all contractor costs and met its target, but it meant the retail arm no longer had access to the capabilities required to deliver its digital ambitions.

Additional sanity questions to explore:

  • What is the sequence of costs savings that maximises early realisation while not impacting the capabilities to deliver the strategic goals?
  • What capabilities can an organisation do without and still deliver its strategic goals?
3. What is the cost savings realisation and banking process?

This is ultimately the reason for doing a cost saving programme. Unfortunately, it can also be the phase that has least rigour.

We experienced a client situation where the ‘cost savings realisation process’ was being managed by a consultancy whose reward structure was based on the amount saved. What could possibly go wrong there?!

When we examined the ‘accounting calculations’ it was clear to all there were significant double counting and unowned savings.

Additional sanity questions to explore:

  • What proportion of the savings target is signed off by the owners of the savings as opposed to being a derived calculated amount (e.g. parts of a FTE that would be impossible to actually realise)?
  • What has been done to ensure that the savings contain no double counting?

Fewer than half (43%) of leaders actually achieve the level of savings they set out to in the first year of cost reduction*

4. How has the cost savings programme been structured to give stakeholder confidence around do-ability of what is possible?

Often budget holders are reluctant in ‘offering more savings’ as they lack confidence in delivering the required supporting change. This is hardly surprising given that fewer than half (43%) of leaders actually achieve the level of savings they set out to in the first year of cost reduction (Gartner*).

We had a client who in the past had typically only delivered £10m savings targets and they were being asked to deliver £100m – ten times what they had achieved previously. This caused significant doubt and anxiety amongst the senior leadership team who were naturally reluctant in tabling bigger savings.

We structured the programme to focus on increasing stakeholder confidence in the do-ability of the target. As delivery confidence increased, the target increased. They eventually delivered £596m – nearly 60 times what they had done previously!

Additional sanity questions to explore:

  • What is being done to improve stakeholder confidence around the do-ability of the target? (e.g. the way the programme is structured, providing extra proven delivery resource etc)
  • How is stakeholder momentum being generated through how progress is being communicated and ‘wins’ celebrated?
5. What savings can be delivered in how the organisation delivers change?

Change is here to stay, so change as organisational competency is quickly becoming a core internal capability. Having spent 20 years helping organisations improve how they do change, we know there are significant ‘wastage/slippage’ savings to be made here.

A 10% saving of the overall change portfolio budget is reasonable, but it may require an investment. We have examples of clients saving £17m and £50m in how they approach change. The saving will dwarf any investment required.

Additional questions to ask:

  • What is the rough opportunity saving possible in how we do change? (For instance, take monthly spend on projects and multiply it with the average slippage period?
  • How can we do change better and save money – acknowledging that this may require some funding?
Can we help?

We help our clients know the right questions to ask, and find the best answers to their challenges. If you think we could help you too, let’s talk.


* Gartner 2022

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