Weight-loss programs offer clues to cost-cutting

While cost optimization should be a priority for all companies regardless of the economic cycle, the reality is that when times are good, it’s on the back burner. During a downturn, it becomes critical. But before handing out those pink slips, finance executives would be well-advised to take a holistic look at their organization to ensure that any changes they propose are strategic and sustainable.
Changing Role of CFOs
There is no question that the role of the chief financial officer has evolved significantly over the last few years. As finance departments have moved from an inward-looking function focused on financial reporting and controls to one focused on improving business performance, CFOs now play a more strategic and operational role within their organizations. As organizations are being asked by their stakeholders to improve performance, enhance revenue, optimize costs and reduce risk, CFOs today have a tremendous amount of responsibility to deliver. Indeed, operations improvement, growth and business risk have become equally pressing for the CFO.
With this broader perspective, CFOs should now be better prepared to tackle cost optimization from a strategic, enterprise-wide perspective. But while it may be easy to see how a more strategic approach to cost management is integral to a CFO’s expanded responsibilities, the difficultly lies in actually achieving the desired results.
Common Cost-Optimization Pitfalls
According to a 2007 KPMG survey of more than 400 companies worldwide, nine out of 10 cost-reduction programs fail to achieve their targets, and gains that are achieved are typically short-lived. Here are some of the most common pitfalls:
• Cost drivers are not clear. Companies need more insight into what drives costs in their business to ensure that cost cutting is targeted in the right places and that the success of cost- management initiatives is properly measured.
• Cost strategies are too cautious. Companies often pick the easy options for cost initiatives, rather than the one which will yield the most savings. While budget and head-count reductions provide short-term cost savings, reducing complexity and improving process efficiency can yield significant and lasting benefits, but only if it is conducted rigorously. Companies must also be prepared to adopt major changes to their business model in order to remain competitive.
• Cost discipline is not embedded in the culture. Every person at a company has a role in cost management, but responsibilities are typically unclear in many organizations. A clear strategy and open communication are vital to the success of any corporate project, but even more so around cost-cutting initiatives, where employees understandably can feel threatened by change.
No Such Thing As a Quick Fix
Fundamentally, one of the first things executives need to change when approaching cost optimization is their mindset. It helps to think of cost cutting in terms of a weight-loss program – one may temporarily lose weight on a crash diet, but in order to maintain an ideal weight, one must adopt a healthy lifestyle and diet. Similarly, only executives who take the time to examine the cost structure throughout their business, and imbed cost discipline within their organization’s culture, will see long-term gains.
To do this, finance executives need to look at costs across whole processes, not just within functions. Ultimately, it means rethinking the entire business model around lower costs, possibly taking out whole layers of the organization or supply chain, examining customer interfaces and considering outsourcing, shared services and offshore help. The focus should be on creating a leaner, more efficient organization, with cost reduction as the consequence, not necessarily the target.
As part of this holistic view of costs, managers need to take responsibility for change beyond their own department, and employee rewards around cost incentives must align with the business strategy.
And while it may seem obvious, generating reliable cost data is crucial in order to make strategic decisions and measure improvements. Therefore, IT not only plays a role in this area, decision-making, but is also critical to many cost-reduction solutions.
Of course it’s easy to grasp for the quick fix when Wall Street and shareholders are looking for answers, and undoubtedly some organizations are sure to repeat past mistakes. But CFOs who remain focused on the big picture will see lasting results. •
Joe Orlando is the New England partner-in-charge for KPMG LLP’s CFO Advisory practice. KPMG LLP, the audit, tax and advisory firm (www.us.kpmg.com), is the U.S. member firm of KPMG International.