McKinsey has published an article on a better way to cut costs. This is an area I’ve been helping companies and non-profit organizations with for well over 2 years now and it continues to surprise me how many organizations are willing to use the knife without much thought behind where to cut and why. This article picks up on that theme.
According to a recent McKinsey Quarterly survey, 79 percent of all companies have cut costs in response to the global economic crisis—but only 53 percent of executives think that doing so has helped their companies weather it. Yet organizations continue to cut. Cost reductions often go wrong, we believe, and our experience suggests that they can be done in a better way.
In an example of how badly things can go wrong, McKinsey offers a story.
An international energy company that needed to save money fast started by simply defining the amount of savings it needed and then required each department to cut costs by a similar amount, primarily through head count reductions, which varied from 17 to 22 percent. The reality, however, was that the company needed to invest more in certain technological areas that were changing quickly, as well as in operations, where performance was far below industry benchmarks. What’s more, the HR and IT departments substantially duplicated certain activities because different layers in the organization were doing similar things. Much deeper cuts could therefore be made in these functions, with little strategic risk. But the company cut costs across the board, and just six months later, technology and operations were lobbying hard to bring in new staff to take on an “uncontrollable workload,” while substantial duplication remained in HR and IT.
The recent Deloitte Debate addresses the pros and cons of outsourcing vs. shared services. Every executive today should know how to speak to both sides of this debate as it underpins the first discussion around reducing costs and increasing agility.
Choosing between outsourcing and shared services does not have to be an either/or decision. Many organizations are best served by a combination of outsourcing and shared services — even within a single business function. Also, many activities can be managed effectively either way. Ultimately, success is not just determined by the approach you choose, but how well you execute it.
When confronted with the prospect of an extended period of economic uncertainty, hard choices are put to business owners and leaders.
Should you reduce front-office costs while remaining responsive to changing customer needs, or explore new competitive risks and growth opportunities?
A paper from Accenture argues that organizations seeking to achieve high performance still have opportunities to expand their markets while remaining cost-competitive and profitable.
When companies focus on front-office costs, their attention tends to be drawn by size: the functional areas with the highest volume of customer transactions, the largest workforces or the biggest operating budgets. Accenture recommends that companies seeking to reduce costs and optimize efficiency in the front office address high-profile programs and operations—but also consider activities and assets that lie between and across marketing, sales and service functions.
These areas often yield significant opportunities that more conventional approaches tend to overlook—such as optimizing use of lower-cost service channels, for example, or reducing the complexity of the product set.
A rigorous, comprehensive approach to identifying opportunities for rapid and sustained cost management in the front office begins with an “outside-in” analysis of the customer base to reveal the voice of the customer. This analysis should combine insight into customer needs and values—identified through robust customer segmentation—with traditional customer and market research and behavioral data gleaned from multiple customer touchpoints.
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