Posted by: Lee Freeman
I thought I would share an article that I recently wrote for Business Connected magazine.
After the recent recession many companies are looking for ways to boost sales and increase profits; the most efficient way of funding these growth strategies is to free-up costs and capital and re-invest these funds into the most promising opportunities. Wrigleys, the chewing gum manufacturers are a prime example of this. By improving gross margins and operating efficiencies they have redirected the savings achieved towards increased marketing spend and innovation to drive growth and have been able to outperform their competitors.
The key is to ensure that any cost management programme is an integral part of a company’s growth strategy. Cost cutting programmes have been commonplace since the 1980’s as organisations strive towards enhanced profit performance, but do they really lead to improved competitive positioning and long-term superior performance? Often not, for the following reasons:
- Their main aim is often to increase the profit line only, meaning any benefits either go straight to the bottom line or are passed onto customers in the form of lower prices;
- They often have a single aim that is applied across all divisions of the business, irrespective unique divisional needs;
- They are often treated as finite projects. Once they are finished, the benefits they delivered are often forgotten and costs start to creep back up.
Aligning a company’s cost management strategy with its overall growth and profit strategy ensures these problems do not occur.
Auditel recently undertook an independent survey to examine how company’s viewed the strategic importance of cost management and its results make interesting reading. The survey revealed the following:
- 70% of organisations do not have a cost management strategy in place;
- Lack of understanding is the greatest obstacle to cost management;
- The topic of cost management is on the boardroom agenda for 82% of respondents;
- 73% of organisations, cost management measures are undertaken in-house;
- Two thirds of respondents recognise that cost management can accelerate performance, improve efficiency and gain competitive advantage.
So does this mean that if you are one of the 70% of organisations who do not have a cost management strategy in place you are losing competitive advantage? The answer is probably. A further worrying result was the fact that 73% of the companies surveyed said they were undertaking cost management measures in house. Attempting these projects in-house is costing companies time and money. It often means that scarce human resources are being diverted from their strategic goals to deal with such exercises, and result in a failure to deliver the long-term benefits the company requires.
Outsourcing to specialist consultants can bring many benefits.
- Providing a thorough understanding of the true cost of products and services;
- Providing up to date knowledge of the supplier market;
- Providing expertise across all business areas
I liken the use of experts in this area to the employment of a specialist tax accountant to deal with an unexpected tax bill. Most management teams would not think twice about spending money on experts to help deal with the tax issue, but are less likely to outsource when the area of cost management is discussed.
Over the past 20 years Auditel has worked with more than 5,000 firms and we can say with some certainty that strategic cost management driven by the right people, with the right tools and knowledge can deliver much greater returns than in-house resource alone. With the right tools and knowledge cost management can lead to improved efficiencies, accelerated performance and help companies gain a competitive advantage.