ARTICLE: A STRUCTURED FRAMEWORK TO FIND SAVINGS

OVERVIEW 

Optimising costs is essential for businesses today… but how do you do it while minimising any impact on customers, employees or growth? 

In this article Simon Keay, Partner,  provides the answer.

Let’s begin by addressing one of the most commonly asked questions when it comes to cost optimisation.

Is Cost Optimisation just another way to say Cost Cutting??

The straightforward answer is No.

COST OPTIMISATION ≠ COST CUTTING

Cost reduction is fairly tactical.  There are times when it’s the right answer, but when it’s not done in a considered way there’s a risk that cutting costs causes more problems than it solves. You can impact your customer experience, lose key people, hurt revenue, and slow both innovation and growth.

Cost optimisation on the other hand is a strategic exercise. It’s the intelligent balancing of whole of life cost against total value.  Optimisation is as much about spending as it is about reducing costs. It’s just that the spending is carefully chosen.

Businesses need to understand the difference between cost reduction and cost optimisation when making strategic decisions to avoid negative outcomes.

In addition, adopting a robust cost optimisation framework, can help businesses to identify areas of improvement, reduce unnecessary expenses, and ultimately enhance profitability.

“AT CROSS 8 WE’VE DEVELOPED A 5 STEP OPTIMISATION FRAMEWORK THAT HAS SAVED OUR CLIENTS MILLIONS OF POUNDS.”

We developed it when we noticed that all of our clients, regardless of their field, had common concerns.

And we’ve used it successfully across multiple industries in both the private and public sector. It answers the questions that came up across all our clients:

  • How to find savings without applying a flat %; and
  • How to ensure they weren’t cutting the wrong thing?

1. LAUNCH 

A cost optimisation is like any other change: if you want it to last, then you need to start with the people. Successful optimisations create awareness up front and work to gain organisational buy-in. How? A full business change plan is beyond the scope of this article, but there are some important things to focus on:

START AT THE TOP 

Senior leaders and key stakeholders must champion the cause and communicate its importance to the entire organisation. Make it clear this is a leadership priority. Appoint a board sponsor, as you would for your most important changes.

SET A CLEAR GOAL

Everyone involved needs to understand the goal. It should be achievable and ambitious. And it isn’t just about a number. Like any other change, it should include the why… the leadership vision for the change.

PLAN FOR RESISTANCE

Acknowledge there will be reluctance and develop a business change plan that manages it. Change management includes many tools such as change stories, network modelling, etc to encourage adoption, but most cost optimisations don’t include it.

AGREE A BASELINE AND DATA SOURCE

This is a more detailed point, but it’s important to do up front. In most organisations it’s possible to find different sets of information. Don’t lose valuable time arguing. Agree the data sources that will be used and explain that the exact numbers are a lot less important than the direction and scale of travel.

CostOptimisiation_V1 optimising costs

2. ASSESS

When it comes to cost optimisation, all business areas are not created equal, so it’s essential to identify the main cost and value drivers.

A full analysis of cost and value drivers can be a sizeable piece of work, but a great deal of value can be unlocked quickly by tying together business activities, high level cost drivers, and value generation.

This approach means you can target more detailed analysis, e.g. Activity Based Costing, where it will have the largest impact.

What you’re looking for here, and how much time you spend on it, depends on the reason you’re doing the cost optimisation. If you’re looking to optimise more broadly and make decisions about where in the business to invest, then you’re going to want to get as much clarity on value drivers as possible. What really generates the value in your business? On the other hand, if you’re looking for a straight reduction in costs then you’ll focus on the cost side of the equation.

CLASSIFICATION

When you’ve got the list of costs broken down, the next step is to classify them. By understanding your costs, you can distinguish between strategic and non-strategic items and prioritise your optimisation efforts effectively.

LOOK FOR RECURRING COSTS

Recurring costs are the most important for optimisation. Often costs can be hidden as one-offs because the vendor was unique. Or the work was done as a project. Regardless of your accounting treatment of these costs, we want to find things that will have an impact on the budget in multiple years.

PRODUCE A COST MODEL

This model serves as a foundational tool for analysing and tracking costs across various dimensions. It allows organisations to identify cost-saving opportunities, assess the impact of potential changes, and make informed decisions.

It doesn’t need to be complicated. We’ve done versions with FTSE100 multi-nationals where it was a model running to thousands of lines… and run the same process for a venture capital firm that needed a fast review of an acquisition target, when it was a simple spreadsheet.

The important thing is to capture the costs against the activities you do. This allows you to identify cost-saving opportunities, assess changes, and make informed decisions.

3. TARGET 

The target phase focuses on identifying specific opportunities and selecting the ones that can be addressed most effectively.

REVIEW ACTIVITIES

The first thing to do is to consider the activities you defined in Stage 2. Are all the activities the organisation is doing strictly necessary, can you remove some completely? Consider your risk appetite if you add controls is it possible to reduce process steps?

ALIGN COST MODEL TO THE GOAL

For the remaining activities, decide some high-level approaches. Are you driven more by the need to reduce capital expenditure, or cut operating costs? You could try to convert fixed costs to variable costs.

If you need to release funds in year, then review in-flight changes: can any be stopped or paused? If you want longer term change, you’ll want to look at recurring costs.

Once you’ve reviewed the cost model, it’s time to set target costs.

DETERMINE WHAT IT SHOULD COST

There are three ways to answer this:

• Internal assessment

• External benchmarking 

  • Zero Based Budgeting

Internal assessment is straightforward, simply compare costs for similar activities within your own business.

Benchmarking is the quicker of the other two. While it’s difficult to get accurate numbers for what others pay yourself, it is usually possible to buy the information from a third-party data source. Just remember it’s a guide, not exact: it’s unlikely you’ll be doing exactly the same thing in exactly the same way.

Zero Based Budgeting will result in a more accurate number for your organisation. Reforecasting all costs from a zero base, rather than the historical norms can take more effort but can drive transformational discussions. On its own Zero-Based Budgeting unlocks saving opportunities of c. 15% from a budget.

PRIORITISATION

All of this will give you a list that’s bigger than you can do in one go. To prioritise options effectively, organisations must evaluate each target based on criteria such as potential cost reduction, feasibility, and strategic impact.

4. REALISE 

How you implement will depend very much on the optimisations you’ve identified. The framework assumes that the goal is to realise benefits as quickly as possible.

MAKE A ROADMAP

It’s important to demonstrate success quickly. As we’ll see in Step 5, embedding cost-saving into the culture is essential. One of the best ways to do that is to show rapid results.

Break the opportunities down into groups based on time to value. We use three simple pots. The first is simply a holding area for the ideas you don’t want to lose but don’t have the resources to deliver right now.

The remaining two groups are:

  • Quick wins – those that can be delivered in 3 months
  • Mid to long-term – anything that will take more than 3 months

For the Quick Wins, it’s best to use an agile approach to any technological or organisational changes. Agile’s release of value through increments is ideally suited to cost optimisations. You don’t need to wait until you can get all the value, to start accessing the benefit.

LOCK INTO BUDGETS

Share the roadmap that shows when the savings will be delivered and build them into the budgets for the impacted areas. This may not be popular, but it will act as a commitment device.

5. EMBED 

To have a lasting impact, businesses need to create a cost-conscious culture, by embedding the principles and practices throughout the entire organisation. 

If you only need savings in one financial year, for example to hit an earnings target, and future years really don’t matter, then it isn’t worth investing time and money in trying to shift the culture of the business.

But in our experience, that’s unusual.

The true value of a cost optimisation comes from the flywheel effect you get when the wider employee base is bought in. And cost optimisation lends itself perfectly to driving employee engagement throughout the business. Staff in any role and at any level can take responsibility for avoiding and eliminating cost wastage.

So, we’ve come to believe it’s essential to focus on the human element. To treat it as a business wide Transformation.

AN ONGOING ACTIVITY

The final step in our framework starts right from day one and runs in parallel with the others. It’s about instilling a cost-conscious mindset across the organisation.

A dedicated team can be set up to identify and deliver the initial savings, but the real value should be expected to come from the lasting benefits it unlocks. As a result, there needs to be more importance than ever placed on the ongoing monitoring and measurement of the implementation.

Establish key performance indicators (KPIs) and regularly check that they’re being met. In the first two years or so after the initial optimisation, you need to keep a closer eye on business unit budgets to make sure that costs have not crept back up, and that savings are genuinely being realised or redirected to value add activities, not simply spent elsewhere.

Build cost considerations into decision making processes, like budgeting, resource allocation, and procurement. In that way, you’ll ensure that cost optimisation becomes a normal part of day-to-day operations.

CONCLUSION

Implementing a robust cost optimisation framework is crucial for organisations aiming to drive efficiency, reduce unnecessary expenses, and maximise value. If Cost Optimisation is approached as a pure cost cutting exercise, then it runs the risk of damaging your business. But by following our five-step framework, organisations can streamline their costs, add value, and even increase employee engagement, all while creating a sustainable cost-conscious culture.

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