ARTICLE: OPTIMISING INTERNAL COSTS – Unlocking Efficiencies for
Competitive Advantage

OVERVIEW

Every business we’ve worked with would agree that optimising costs is essential, but knowing where to start can be difficult.

In this article we do a deep dive into some specific opportunities within internal costs.

We walk you through a 4 step process you can use to get the most from internal cost optimisation and highlight concrete cost saving ideas you could implement in your own business.

In a previous article, we described the Cross 8 overarching approach to identifying and implementing cost optimisation. If you haven’t seen it, you can view it here Cost Optimisation: A Structured Framework to Find Savings. 

IS THIS THE RIGHT TIME FOR COST OPTIMISATION?

In a word, yes. For high performing organisations cost optimisation is central to their approach throughout good and tough times. It is often much easier to do it thoughtfully, and therefore, to do it well, when the business is performing well.

Cost Optimisation does not have to be an unwieldy exercise. Later in the article we will describe how you can get started without tying up the business in detailed process work. 

It is much easier to do it thoughtfully, and therefore, to do it well, when the business is performing well. 

WHY FOCUS INTERNALLY? YOU GET MORE THAN JUST COST SAVINGS?

It can be tempting to start a cost optimisation exercise by focusing on external spending. That’s understandable, after all, external costs are easy to quantify, and reducing them is often an easier sell inside the business. But that external focus leaves a big missed opportunity.

If you’ve read the Cross 8 cost saving framework, you’ll know that we start with a cost and value driver analysis. That way savings are targeted towards the biggest financial impact, irrespective of whether they’re internal or external. There are benefits to focusing on internal costs that go beyond the pure numbers:

  • Control and Visibility: You have more direct control over internal costs and often have better visibility into where money is being spent.
  • Quick Wins: Internal cost saving measures can often be implemented quickly and show immediate results.
  • Employee Empowerment: Involving employees in cost saving initiatives boosts engagement and can help foster a broader culture of continuous improvement.

And there is plenty of scope to go at, internal costs cover a huge range of items, including everything from buildings to employee costs – which as we’ll see later, has levers that are much more subtle than simply redundancies – IT, and change costs.

By assessing these costs carefully and making targeted adjustments, you can unlock substantial savings and reinvest those funds into growth strategies, product innovation, or bolstering your competitive position

HOW TO TACKLE FINDING SAVINGS: AN ORDERED APPROACH

Cost optimisation has a bad reputation because organisations regularly target the wrong costs in cost cutting, not cost optimisation exercises.

If you want to make a long term impact then it pays to approach it in the following order: 

  • Effective – Are we doing the right things?
  • Efficient – Are we doing them right?
  • Organised – Are we structured to deliver them? 
  • Placed – Are we doing them in the right place?

So, let’s take a look at each of these steps in turn and suggest some specific ways to save costs under each.

EFFECTIVE: ARE WE DOING THE RIGHT THINGS?

We start here because it is without a doubt the most important question to ask, and it’s one that is too often just assumed. The brutal truth is, there’s no point making a process or task more efficient if you shouldn’t be doing it in the first place.

While efficiency relates to performing tasks optimally, effectiveness is about ensuring those tasks align with an organisation’s core strategies and objectives.

Too often companies become mired in operational minutiae, dedicating resources to activities that may be executed perfectly yet contribute little to their overall goals.

“THERE’S NO POINT MAKING A PROCESS MORE EFFICIENT, IF YOU SHOULDN’T BE DOING IT IN THE FIRST PLACE.”

CONCRETE EFFECTIVENESS ACTIONS

1. Analyse Value Drivers: Conduct a value analysis to identify and prioritise the activities that are delivering the most value to your customers and the organisation.

2. Strategic Alignment Review: Conduct a review to ensure that operational activities are aligned with the organisation’s overall goals and priorities. You should be able to draw a clear line between the things being done in the business and the top level goals.

3. Target Resources: A dedicated team should take the output of 1 & 2 and identify a specific list of opportunities to redirect resources toward value creating activities. By focusing resources on high value activities and eliminating or outsourcing low value activities, organisations can maximise return on investment and improve overall performance.

Achieving operational effectiveness requires a top down approach. The leadership team has to clearly articulate the organisation’s core strategies and objectives, and to give their unambiguous support for cutting activities that don’t align to the strategy or generate value.

The only activities you should take into the next step are those that you know are essential to deliver value.

Optional – Apply the same value analysis to the products / services you provide. By critically evaluating your product or service portfolio, you can focus resources on the products that maximise value, and potentially discontinue less profitable lines.

EFFICIENT: ARE WE DOING THEM RIGHT?

All organisations have a complex set of interweaving processes that govern the flow of work and information, and deliver their products. And however well designed these were originally, processes have a tendency to accumulate inefficiencies, resulting in bottlenecks, unnecessary steps, and manual interventions that waste resources.

Making those processes more efficient will require you to understand them, but as we suggested earlier that doesn’t need to mean a large scale process mapping exercise. To make a difference you don’t need to document everything down to the most granular level. Just like when we considered assessing the Effectiveness, the best way to avoid distracting the business is to set up a small team who can specialise in extracting the right level of information to make an impact.

The goal here is to understand enough to optimise costs, not to turn process mapping itself into another cost line. There are several options open to us today when it comes to optimising for efficiency. 

In addition to traditional optimisation techniques such as Lean Six Sigma and Robotic process automation (RPA) now Artificial Intelligence (AI) can automate many routine activities, freeing up human capital for higher-value work.

CONCRETE EFFICIENCY ACTIONS:

1. Value Stream Mapping: Use value stream mapping techniques to visualise and analyse end-to-end processes, identify bottlenecks, and optimise workflows for greater efficiency. By mapping the flow of materials, information, and activities, organisations can identify opportunities for process improvement and waste reduction.

2. Process Re-engineering: Implement proven methods such as Lean Six Sigma to standardise best practice and redesign workflows so that waste is eliminated, operations streamlined, and efficiency is improved.

3. Automation: Implement automation technologies to automate repetitive tasks and reduce manual labour costs. By leveraging technology solutions such as robotic process automation (RPA) and workflow automation tools, organisations can improve process efficiency, accuracy, and scalability.

By identifying inefficiencies and implementing targeted improvements, organisations can realise substantial cost savings while enhancing productivity and quality. 

BUSINESS SPECIFIC OPTIONS:

1. Inventory Management and Short Cycle Manufacturing: For manufacturing, distribution, and retail organisations, inventory carrying costs can constitute a substantial expense. Reducing inventory through short cycle practices and demand forecasting capabilities can free up working capital.

2. Technology Rationalisation and Cloud Migration: While IT rationalisation most often means engaging with vendors, and is covered in other Cross 8 articles1, if your IT estate is handled in house then it is definitely worth looking at. System landscapes that have evolved organically almost inevitably have opportunities for significant cost savings. Consider redundant systems, license fees, maintenance, and IT Governance / Lifecycle Management. 

ORGANISED: ARE WE STRUCTURED TO DELIVER THEM?

The way an organisation is designed can significantly impact its cost structure, especially when it comes to management overhead. This is particularly true in businesses that have been around for a while. Over time organisations accumulate excess layers of management, leading to bloated costs and convoluted reporting lines.

By analysing spans of control – the number of direct reports per manager – you can identify opportunities to flatten your organisational structures and increase the supervisory scope of remaining managers.

There’s no one-size-fits-all answer as to what the right number of direct reports is. Usually it’s a matter of looking across your organisation and identifying outliers, then drilling down on the reasons why they exist. Sometimes they will be perfectly appropriate, in others they indicate an opportunity to save costs and make the business more efficient.

CONCRETE ORGANISATIONAL ACTIONS:

1. Flatten Structure: Reduce the number of levels in the organisation to streamline communication, decision making, and accountability. By flattening the organisational structure, you can reduce bureaucracy, improve agility, and empower employees to make faster decisions.

2. Cross Functional Teams: Encourage collaboration and teamwork across departments by forming cross functional teams to tackle projects and initiatives. By breaking down silos and promoting information sharing, you can improve communication, innovation, and problem-solving capabilities.

3. Empowerment and Delegation: Empower employees at all levels to make decisions and take ownership of their work. By delegating authority and responsibility appropriately, you can reduce bottlenecks, improve efficiency, and foster a culture of accountability and innovation. When you’re happy the structure is designed to efficiently deliver the business’s goals, then consider the following additional opportunities to optimise workforce costs.

ADDITIONAL ORGANISATIONAL OPPORTUNITIES:

1. Analyse Workforce Composition: Regularly evaluate the balance between employees, consultants, and contingent labour. This mix can have profound cost implications.

2. Headcount Management and Hiring: Compulsory redundancies should obviously be considered a last resort, but it is possible to achieve substantial savings through the use of voluntary offers, or natural attrition in combination with targeted hiring freezes.

3. Compensation and Benefits Review: Conduct a benchmarking exercise on employee compensation and benefits.

4. Discretionary Expense: Reining in spending such as corporate events, travel, and entertainment budgets, represents a quick, high-impact opportunity. However, leadership must strike a balance between cost control and maintaining employee engagement and development initiatives.

PLACED: ARE WE DOING THEM IN THE RIGHT PLACE?

The final element to consider is the physical locations and buildings from which you operate. This can represent a significant cost driver, encompassing real estate expenses, utilities, and the overhead of maintaining multiple sites. Yet many organisations do not have a location strategy, instead location is driven by inertia.

By conducting a comprehensive evaluation of your geographic footprint, you can identify opportunities for site consolidation or relocation to lower cost regions.

And with hybrid / remote work becoming ever more reliable, expensive office space can be targeted more effectively, potentially reducing the overall estate while maintaining the benefit of in person facilities where and when appropriate.

Of course, decisions regarding where you are based should consider factors beyond pure cost, such as proximity to customers, access to talent, and the potential impact on corporate culture and employee engagement. Leadership teams should work closely with real estate and HR experts to develop tailored location strategies that balance cost optimisation with operational and cultural considerations. But the opportunity to save cost by having a location strategy is undeniable.

CONCRETE LOCATION ACTIONS:

1. Consolidate Facilities: Evaluate the feasibility of combining locations to reduce overhead costs, improve coordination, and streamline operations.

2. Increase Hybrid / Remote Work: Consider allowing employees to work remotely. By reducing the need to be office based, you can save costs, improve work life balance, reduce your carbon footprint, and potentially access wider talent pools.

3. Low Cost Locations: Assess lower cost locations against your wider business strategy, e.g. is it possible to deliver the same value while relocating from expensive city centres. 

CONCLUSION

Cost optimisation should absolutely include external vendor costs, but in a time of tightened lending and when competitive advantages are increasingly fleeting, optimising internal costs represents a crucial lever that it’s essential you don’t miss.

Whether you use the specific cost saving suggestions in this article or not, by following the structured approach to ensure you are:

  • Doing the right things
  • Efficiently
  • With the right organisational structure
  • In the best place

You will be able to identify internal opportunities that will unlock substantial savings.

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