When Cost Focus Goes Wrong

So you have a “cost-conscious” culture – your employees “own” the cost structure, they take responsibility for it, they live and breathe it. That’s a good thing, right?

Not if you ask a number of companies which embraced cost-cutting as the only way forward.

Take into account an example of a well known consumer goods company which had spent five years attempting to cut costs. It had looked at expenses across the board. From travel and procurement to HR and IT to core business services, the company sought savings.

Unfortunately, the cost-cutting decisions the company made did not resonate well. The amount it saved was neither enough nor lasting – further encumbered by the company’s lack of executive support for travel policy changes.

The key according to Ernst and Young’s Gregg Clark is to align your cost-cutting decisions to a broader business strategy and ensure they fit within the culture of the company.

Cutting costs too far is a salutary lesson for any company – but especially to CFOs, who increasingly, “own the cost reduction agenda,” as Ernst & Young puts it. Attacking the cost structure is an art, not a science, and leaders must know when to back off.

It is one thing to say, “we are in danger of being disrupted, we must manage our costs better” – but quite another to endanger the company through going too far. Because companies are being disrupted, and do need to manage their costs better.

But the cost reduction imperative is increasingly seen as simply part of the expert advice that the CFO’s team provides, to support boardroom decisions. “In addition to their traditional role as head of finance, CFOs are increasingly taking the lead in corporate strategy development and business stewardship,” says an Ernst & Young spokesperson.

As strategic procurement consultancy The Faculty outlines, while many aspects of growth are focussed on growing the top-line, cost management remains a critical lever in achieving the company’s growth objectives.

This requires a top-down and bottom-up deep dive into an organisation’s analytics. Not only a massive data dump but a real understanding of what the data all means. The upshot could be a better utilisation of technology or more shared resources although the real key is to ensure the decisions resonate culturally within an organisation.

Manage the change well and a lower cost base provides a business with a lot more agility to respond to changing market conditions, says a spokesperson from The Faculty, and also affords it the option to out-invest rivals in marketing and new product development.

But cost is not just something that the ‘finance or accounting function’ drives: it should be embedded in the culture company-wide, so as to compound value to deliver long-term shareholder value.

As the 2014 American Express CFO Future-proofing Survey showed, managing expenses and the rising costs of doing business is one of the biggest challenges management faces in growing a company. But it is also one of the biggest opportunities, if managed properly. It is a powerful means, but not – an end in itself.