Creating a Good Cost-Conscious Culture

What is the best way for a company to grow? That’s easy: sell more of its goods, or services. And that does work – but companies also need to focus on controlling costs.

If overheads are allowed to swell unmonitored, the company is unlikely to stay competitive for long.

Companies are conditioned to focus on increasing revenue, but true ‘future-proofing’ of a company requires a systematic approach to controlling costs, as a way to ensure long-term value creation.

That is simply sound financial management: monitoring, measuring and benchmarking processes and performance, to identify efficiencies, reduce costs, drive productivity and innovate for the future.

Increasingly, this is the role of the CFO function, says the 2014 American Express CFO Future-Proofing Survey. According to the American Express white paper, the CFO’s role has extended well beyond the traditional ‘finance’ function with responsibilities including oversight in human resources, procurement, supply chain, planning and strategy, IT, investor and stakeholder relations, systems and processes.

The survey revealed that responsibility for protecting businesses from failure was increasingly falling at the feet of CFOs. More and more, the CFO function drives the strategy and the organisational behaviour on which future business success is built.

Central to this is understanding of costs – not just in the sense of the dollars, and where they fit in the whole – but who “owns” the costs.

As McKinsey has stated in its own research, most cost innovation in a company happens at a very small and practical level. Management, in this particular case, the CFO needs to identify the specific groups or individuals responsible for particular costs – not only to deal with cost blow-outs, but also to be able to encourage this cost innovation.

Companies need to re-define the way they collect and report information, says McKinsey, to ensure that costs are identified, broken out and responsibility for them assigned to each organisational unit. Then, the leaders or owners responsible for these costs can be held accountable through appropriate incentives, such as performance evaluations, that consider both costs and business performance.

The role of the CFO is to clearly articulate the link between cost management and strategy. “Strategy must lead cost-cutting efforts, not vice versa. The goal cannot be merely to meet a bottom-line target,” says McKinsey.

If a company gets this right, the cost reduction initiatives are explicitly linked to its broader strategic plans, and the high-performing units are not starved of the resources needed for valuable growth investments.

And in the companies that do this best – that are truly ‘future-proofed’ – the CFO is leading the way.