BusinessCorporate FinanceThe FDs’ FD: The burning desire to cut costs

The FDs' FD: The burning desire to cut costs

There is no escaping reality ­ the majority of businesses are feeling the heat from the slowing economy and credit crunch. And the first thing that management tends to do in this situation is turn off all discretionary expenditure and cut back on investment.

margaret ewing

I know from my own experience that, in this situation, the board immediately
turns to the finance director to be the initiator and implementer of a cost
reduction programme.

Unless you really have 100% unwavering support from your CEO and there is
true buy-in to the need for such a programme from the other executives and
senior managers, however, you are being set up for failure.

The traditional approach to tactical cost cutting rarely delivers significant
enough benefits in either the short or long term.

I still have the scars from the many occasions I attempted to implement a
cross-organisation cost reduction programme and only succeeded in delivering a
fraction of the saving initially promised.

The ideal is to restructure the cost base to make your organisation more fit
for purpose now, and make it sustainable in the long term.

But this means taking a strategic (rather than tactical) approach to cost
reduction: looking at new operating models; tackling the sacred cows of product
and system rationalisation; facing the old chestnuts of payback on ERP
investments; and addressing the fundamentals of right skilling and resourcing of
the workforce.

This requires vision and commitment from senior management, and discipline
and rigour to get it implemented. You need to clearly spell out the implications
of the ‘burning fire’ and senior management need to have their feet ‘held to
that fire’.

Rewards follow the brave. Those organisations that have tackled the
fundamentals of their cost base, broken out of the cycle of cost reduction
targets being part of the annual budget process and embedded cost management
into the DNA of the business, are the ones that are pulling away from the pack
in managing their margins.

Are you brave enough to take on this challenge? For some it may mean the
difference between survival and failure.


Margaret Ewing is a partner and vice-chairman at Deloitte and former CFO of
BAA

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