Cost excellence must for business in gloomy economy

LAHORE: The corporate sector in Pakistan is still coming out of the nightmarish 2007-13 national recession while coping with the rapidly shifting market dynamics and gloomy global economy.

Hard pressed to cut costs, they are undertaking measures like squeezing suppliers, shuttering facilities, and reducing head count, however, it cannot suffice. They have to go for true cost excellence in a sustainable way with no chance of costs creeping up again in the future.

This can be achieved by focusing on closing gaps, eliminating shortcomings and addressing input costs without compromising quality. It also increases transparency and accountability, and boosts employee morale and decision-making processes, whereas controls ensure unproductive practices do not creep back.

The low cost base of a company is evaluated by the expenses incurred in selling, general and administrative expenses as percentage of revenues which results in higher total shareholders returns. To achieve true cost excellence the corporate leaders focus on eliminating costs at their source, independent of their allocation within the company. They keep an eye on interdependencies within the organisation. A department of the company may come up with a plan that might save cost and time of that section; but the planners have to take into account how cost and time of other sections within the company are impacted by this plan. Cost cutting targets must be fixed after proper analyses. Successful corporate leaders set bold targets from the start after sufficient research so they can defend them with conviction. Modern day challenges could only be tackled if the company strives for early success in implementation. Early success helps in boosting morale and building momentum as employees start believing that the target is achievable. When employees take ownership of the cost cutting targets they accelerate the progress.

Thus the savings can be utilised to fund other cost excellence projects. True cost excellence is impossible to achieve without executive commitment and accountability. Top executives need to delegate the ownership of key elements among lower level executives. However, the most critical initiatives should be placed under the command of the top talent.

Constant communication with the employees is essential right from the start of the cost excellence initiative. The employees should have clear understanding of goals and the details of the process being undertaken. Since cost excellence requires transparent and clear processes it would be a folly to mislead the employees or keep them in the dark. Such actions might produce morale-sapping surprises later.

To achieve cost excellence on above lines, companies need to take six steps. The first is to ensure agreement between the leadership and the top management. The management should outline the overall goals and the scope of the company’s needs, and clearly and firmly state what they hope to achieve from the beginning. The prioritised goals should be addressed by the cost reduction plan.

The second step is to select the correct methodologies. There are a number of well-proven methodologies depending on the goals and scope of the programme. The trick is to tailor-mix different available tools. Cost analysis through the selected methodology is the third step that enables an organisation to examine personnel costs. The results can then be compared with those of competitors. It can for instance compare what percentage of the total workforce the competitor has.

The fourth step is to adopt a bottom-up process to generate ideas for delivering programme’s quantitative and qualitative goals.