Cost Management : Management Today Survey
How To Do More When You Have Less
The panel explores how a strategic approach to managing costs pays dividends by allowing space for expansion and investment, while still trimming off the flab.
MT and Auditel sat down with a panel of experts to debate how it’s possible for businesses to manage costs but still expand. On the panel were Ian Wylie, MT special projects editor; Rachel Parr, chief finance and strategic initiatives director, Save the Children; Charles Baden-Fuller professor of strategy, Cass Business School; Chris Allison managing director, Auditel; Stephen Ibbotson head of finance and management faculty, ICAEW; Maggie Frost group finance director, VCCF; and Oliver Hogan director, Centre for Economics and Business Research.
Ian Wylie: What’s the relationship between growth and cost management in your organisations?
Rachel Parr: At Save the Children, we have ambitions to grow, but the charity sector is under challenge. There’s less free cash around. The models of people’s giving are changing. I spent over 20 years at GSK, where we were producing drugs and saving lives, but with a unified profit motive. It’s not the same in this sector, which hasn’t been as disciplined as it might be in terms of the way it spends and the way it looks at KPIs and the benefits of each project. So we’re implementing a system that allows us to be much clearer about what we spend.
Charles Baden-Fuller: I’m involved in a research project that looks at business models for the future. Companies tend to become imprisoned by thinking of how they can get better within their current business model. They can get terribly focused on reducing costs within that set of constraints, when their competitors are moving on and looking at different business models.
Chris Allison: Most people think cost management is about cost cutting or cost reduction. And our recent survey with MT suggests that while 70% of organisations are focused on cost management, most of the work they’re doing is on the cost reduction side. Cost management requires in-house resources – you’ve got to have the software tools to be able to monitor what you’re doing effectively. And then you’ve got to have a process that gives that management information to the decision-makers. But another survey, by KPMG, reckoned that 95% of cost reduction exercises are short term and those costs will flood back into those businesses. So our focus is creating a professional cost management model that has strategic rules apart from just the cost reduction aspect.
Maggie Frost: I view my role more as cost management than cost reduction. Having worked in a privately owned agency for eight years, I’ve gained the intuition and ability to make judgements that come from learning how to survive. But often it’s me, the FD, who’s the one saying, I think we should spend this. I care more about that money being well spent in order for us to grow. And I think that’s what businesses should be focusing on.
Stephen Ibbotson: The two things that feature very highly in our recent survey of members are business performance and cost management. I established my career with Avon, as the UK and European finance director and latterly corporate controller in New York. It’s a customer-focused organisation, very sales and marketing driven. Someone had to help them spend money in the right way, not necessarily spend less. You can use cost management to improve performance. Certainly that was my experience at Avon. It was often very helpful to spend more money on sales and marketing because the returns were much more.
Ian Wylie: How will the economic environment of the next 18 months determine cost management strategies?
Oliver Hogan: We have turned from quite bearish to quite bullish rather suddenly. There has been a serious up-tick in confidence across the economy, both for businesses and consumers. It’s almost like a start-up type feeling. However, we think the biggest issue for UK business remains the ‘super competitiveness’ of the eastern economies. We see the industrialisation of the east as the biggest economic event since the Industrial Revolution. Labour costs in China will probably eventually reach 50% of what they are in the UK. So in the long term, UK companies still have to be 50% more competitive to make up for it. And there are significant risks to the oil price from turbulence in the Middle East. With the economy in recovery there’s a risk of inflationary pressures too. So the question for businesses is: if you’ve taken your cost and labour savings as far as you can go, what are those other areas where you can reduce what you spend?
Stephen Ibbotson: I read recently about a Deloitte study in the Harvard Business Review that looked at how best to improve business performance. Their research suggested two key factors. The first is, don’t do it cheaply, do it better, which I think is something that’s useful for the UK to consider, as we’re never going to compete with China on cost and our productivity is pretty poor. And, secondly and possibly more controversially, put revenue generation ahead of cost saving.
Ian Wylie: What has been the traditional approach to saving and managing costs in the UK?
Chris Allison: In the boom years of the 1990s, people didn’t look at their cost base as much as they should have. Lip service was paid to improving efficiencies. The world changed with the 2008 credit crunch. It took some organisations a year, maybe two to come to grips with how seismic that change was. And often the reaction was a knee-jerk cost reduction exercise, without the right strategy in place. And as a result, many of those exercises have failed to deliver what companies expected.
Stephen Ibbotson: When I was at Avon, we went through a de-layering exercise worldwide, taking 2,000 people out. But in effect we took out loads of skill and experience. And it definitely affected business performance.
Maggie Frost: At VCCF we’re lucky that both the CEO, who is one of the founding partners, and I have worked in small companies where you have to question everything you do. The problem is now we’re getting to the size where we need to corporatise. I can see a cost management juggling act ahead. How do you become more corporate with rules and regulations yet keep your flexible entrepreneurial environment? That’s the big challenge for us.
Charles Baden-Fuller: One of the interesting challenges for the UK in relation to technology and creativity is how you can invest in new ways of doing things that require less capital to do more. You can no longer raise £50m in a funding round. So you have to think about what you can do with a smaller capital base. You can call that cost management – doing more with less.
Chris Allison: There’s another challenge and that’s educating people to be cost conscious. If you look at most entrepreneurial ventures and small business start-ups, the sad fact is that four out of five fail within four years. And that’s because they got the cost base wrong and, quite simply, they ran out of money. So being cost conscious, managing your start-up strategy and being more effective in how you deploy your working capital will improve your chances of survival and growth.
Maggie Frost: From my experience of working with companies, there is also a question mark over how they price their products or services. It might be that small businesses are failing because their costs are wrong, but it might be that they are not pricing and selling properly. There’s a danger of seeing the easiest way of improving profitability as cutting costs. When, in actual fact, a more optimistic approach might be to go out and sell more. The question should be, how can I get more from this client?
Charles Baden-Fuller: One question for companies is: can you shift your costs around? When business conditions change, maybe because you have a new customer opportunity that you’ve got to give up, or maybe because customers have disappeared and you have to cut back because revenues or donations are changing and falling, can you shift your costs around? In my experience of universities, they do not know how to move costs around if, say, suddenly people don’t want to study French but instead want to study French and business. The systems aren’t flexible enough to allow that shift as the business changes.
Rachel Parr: I think it’s really important to have sponsorship from the top – complete access and support – and that, as FD, you are a great business partner.
Maggie Frost: It’s about imbuing confidence, and also giving people the tools and skills they need.
Chris Allison: Some of the businesses we go into are toxic. We find business units that aren’t speaking to each other at all. And they don’t necessarily see or understand the strategic goals. What are their goals and ambitions as an organisation and how are they going to get there? My business focuses on cost management and the strategies to do that. But, equally, organisations have got to go for growth and that means you don’t waste money but at the same time you need a marketing strategy that is going to deliver. So professional cost management is about being flexible and moving the strategy in keeping with those goals. That’s one of the reasons why we always suggest that the CEO should get on board, and it’s been rewarding to see that the CEOs are more involved now. It falls within the function of the finance director but it’s got to be a partnership, and you’ve got to have dialogue. And part of our job when we’re brought in is to educate people as to why they should align themselves to the goals of their company and, from there, figure out how to manage their costs more effectively.
Stephen Ibbotson: When I was in the UK we were very clear as a leadership team with our messages about costs. We talked a lot to the employees and the managers throughout the organisation and everyone understood what we were about so that we would save money. And there were times when the CEO would be the good cop and I’d have to be the bad cop. But I also worked with one MD who got the cost-saving bug at one point around the de-layering exercise I mentioned earlier, and she probably started taking the cost reduction too far.
Ian Wylie: Our research among MT readers has suggested that the number one cost management challenge for the next 12 months will be HR. Are we slightly fixated with head count when it comes to managing costs?
Maggie Frost: I’ve sat in on meetings where the discussion has been about losing a £20,000 account co-ordinator. That makes no difference to our profit and loss at all. I really don’t want to waste time in meetings about releasing somebody on £20k, because that’s not the root of the problem. The source of the problem will be elsewhere – we aren’t good enough or selling enough. A CFO’s role is to be visionary as well as caring about the detail.