Making meaningful changes to an organization’s financial performance requires more than a cursory fine-tuning of your cost base. There needs to be a significant cultural shift in the way costs are managed.
There are two key concepts in play here: First, providing sufficiently strong cost analytics such that managers can make effective decisions about the right level of cost to support the business. Second, and perhaps more important, is executive discipline to trust managers to manage costs appropriately as they see fit.
The fundamentals of a high-performance, cost-conscious culture are:
Instruct top management to demonstrate to employees the importance of reducing cost to the organization’s success. Everyone in the organization, from senior executives to those in the field, needs to view all costs as opportunities for creating additional value.
Hire the best-qualified employees. These employees can then develop high-quality activities and products, because long-term total cost with high quality is less than long term total cost with low quality. Effective management requires a deeper understanding of the work activities performed by employees in pursuit of business goals.
Know your baseline. Organizations should establish cost and performance baseline information, against which managers can check their progress in driving down costs and driving up efficiency and productivity.
Create cost category owners or “cost champions.” These staff should build detailed knowledge of categories of cost, and have the responsibility and the authority to promote value for money vertically within divisions and branches as well as horizontally against their deliverable or output category, and across program and service lines or divisions and branches.
Use comparative data. Senior managers should use key performance indicators to benchmark costs internally (and externally wherever possible) and to calculate how to reduce costs to target levels.
Link compensation to cost reduction. These include gains in productivity and efficiency, achievement of target cost, and improvement over the previous period’s costs.
Build good working relationships between senior operational managers and finance professionals. Both groups must recognize the contribution and expertise each brings to decision-taking processes. Finance staff should work closely with other senior managers, to produce timely and accurate cost management information to support evidence-based decision taking.
Grant employees access not only to the right skills and tools to manage cost effectively, but also the necessary feedback loops and measures to properly gauge the effectiveness of their efforts.Kumar Amarendra, PhD, is GM & Head of FP&A, Pyramid IT Consulting, Noida Area, India.