Cost is also a 4 letter word in the corporate world !

My first tryst with cost happened a little more than a decade back when the company reins were taken over by the CFO; he replaced a young charismatic CEO who found greener grass elsewhere. The first review meeting conducted by the CFO with score of year of experience announced an initiative to control costs – something he had harped about in the past but was overruled. His predecessor always worked on the numerator (revenue) and not the denominator (cost) when looking at profits and ratios.

Many years later I was facing a sense of déjà vu in another company when the new management which had initially created high costs now under pressure from shareholders started an initiative to cut costs. Fast forward to current business environment when everyone is uncertain of global trends and policies that potentially impact parts of business and resultant revenue and profits – quite a few are preparing to cut costs to sustain impact if any to short-term and long-term operations and business strategies.

Why not cut the flab or get rid of deadwood that the organization may have collected on the way. In almost all such cases of cost containment, it is typically a new set of Managers who initiate the exercise wanting to sculpt the company in a specific way getting rid of legacy. The other interesting fact is that almost all such cases a big name super expensive consulting company – coincidentally the same one in all cases that I have seen – is hired to suggest ways and means to reduce cost. So what’s new in cost cutting ?

Predictably it starts with hiring freeze, HR makes a list of low performers (exception Finance team) travel freeze for everyone except the Management; the inner circle gets discretionary approvals, everyone else is expected to use Audio/Videoconferencing. Cookies and biscuits disappear from meetings, packaged bottled water is replaced by refilled water bottles, control on printing with introduction of network printers, deferred training and development budgets, and last but not the least a cut in IT operating budgets and new projects.

Frugality in times of plenty is a virtue practiced by a few and they stay immune to variability in the market conditions. Working for one such company we celebrated our most profitable year when everyone was struggling with costs in the year of black swans. If that is not part of the organizational DNA, operating expenses should ideally be reviewed periodically and not necessarily wait for a formal cost control exercise. The challenge lies with some types of costs which do not lend themselves to reduction without an impact.

So when as a CIO I was asked to cut cost by 20%, it created an interesting predicament; can I cut manpower supporting business as usual ? Should I get rid of my Project Managers who have delivered successfully in the past ? Shall I ask the support partner to reduce onsite manpower without impacting SLA ? Can I cut network bandwidth across and hope that the business will not notice the resultant impact ? Annual Maintenance Costs are locked in with COTS and hardware vendors, no not much scope there.

Can hardware refresh be deferred ? For desktops and laptops potentially by few quarters, the server upgrades cannot if the transaction volume continues organic growth. New projects can be deferred or pushed into functional P&L, after all if they want the new solutions, they will find a way to justify. In both cases IT took a similar approach to cost cuts with partial success; reduction in operating expenses was marginal since the contracts were already optimized by Purchase and Finance, the deferred capital investment made up for the shortfall.

Decades apart the rest of the company dithered and murmurs of unrest were heard across the companies. The big consultant bill horrified the employees who had seen their friends depart and morale go south across functions. The net resultant saving was something they could have achieved by involving the staff across levels invoking their emotional connect towards their adopted company. The leadership team declared success gloating in the derived glory to gift themselves an exotic international offsite as a reward.

So much for cost savings which were believed to be necessary for survival of the company (read the management team). Mature leaders do not take conventional wisdom at face value, they internalize the opportunity and seek collaboration across layers for sure shot success. E.g. the frugal company that beat profits in a lean year by calling upon all employees to contribute; it enrolled every CXO to the cause not by setting targets, but appealing to help the company and how they did ? It remains a benchmark for the company !

Cost does not need to be a 4 letter word !

Making buying decisions based only on cost is mostly a bad idea

A new CEO came on board from one of the worthy competitors; he was hired to scale up and scale out in a market that was beginning to adopt the services offered by the company. His earlier stint was with a global mature enterprise in the same industry where he had grown the business as sales head and was now ready to take on the role of a CEO. The young industry required large teams to deliver onsite services to customers; technology did provide a differentiator where early adopters had seen the value.

The CEOs newly adopted company had grown organically beating market growth but lagging behind on profitability, partly due to continuous expansion and rest attributable to operational efficiency which required technology interventions. To the CEO it was quickly evident that inducting new solutions would bring in the requisite process compliance and reduce exceptions which mostly led to costs going out of control; reduced dependence on individual performers would lead to the desired consistency and profitability.

In the initial assessment he realized that corporate overheads were low and did not lend themselves to further reduction; he therefore focused his attention on investments required to bring in requisite technology solutions and thus tasked a small team of veterans to evaluate named solutions which largely comprised the universe of available options. The team rejuvenated with the new ideas from the newbie leader jumped into the evaluation process; industry research also pointed back to the same set of vendors.

The solution providers – local and global – offered varied functionality that allowed for extension of services to be offered to customers; at the core, all offered basic process automation and customer management. The choice thus depended on technology stack, value added features, ease of use, customer and employee self-service, mobile deployment, analytics, and ability to deploy across the cloud as well as on premise. Flexible and conventional licensing models rounded up the full stack of evaluation criteria.

Within the stipulated time, the team reverted with their evaluation and recommendation; they had done a fairly good job of mapping the existing business processes and identifying the best option for their company. They had also taken into consideration the company culture and primary decision drivers – low risk and cost; in the past the management had been hesitant to explore high capital investments instead preferring to work on low cost operating model where the plug can be pulled quickly to reduce losses.

In the next Board meeting the CEO scheduled the proposal while the evaluation team stayed in the back of the room for any clarifications. The meeting started a bit late, and dragged on with the discussion on financial numbers taking up a large part of the day; by the time the item on the agenda representing the technology solution came up, the Board members declared exhaustion and to the dismay of the team present deferred it and other remaining items to the next meeting planned after a gap of 3 months.

In the next meeting the Board did manage to discuss the project and asked the CEO to rework the risk return model as they found the outflow high. A Board member was assigned the responsibility to validate the final proposal and approve. Between the CEO and the Board member they kept at it for a while attempting to get the numbers down while increasing the scope of deliverables. In the interim business continued to grow and new customer acquisitions took away the CEO’s attention from the project.

A short economic instability and the business saw a blip in performance diverting everyone’s attention to bringing revenue numbers back on track. The company continued the growth trajectory and the project was now on the backburner with all attention on further cost cutting to deliver Board mandated margins. The CEO attempted to revive the discussion on the value proposition and market competitiveness the company stood to gain with automation and technology solutions, only to be chastised for proposing spends in a lean period.

Nimbler and technology driven competition overtook the company in market standing; the Board brought in consultants to create a business strategy that would help the company regain lost glory. Months later the Chief Consultant presented the business strategy for the next 3-5 years to full attendance from Management and the Board. The plan looked familiar and so did the steps they outlined for business efficiency and profitability; by the time the meeting ended, everyone looked at the CEO as an awkward silence prevailed.

The plan and strategy was what the CEO had outlined with his favorite project that had quietly died in the hemming and hawing over the last few years !

How much more with less ?

Over the years economic cycles have turned all conventional wisdom upside down; the new normal that became reality before the turn of the decade squeezed all the unnecessary costs out of every line item in IT budgets. Do more with less being the mantra, CIOs scrutinized operations and optimized them ruthlessly. Half a decade later and half way through the year, one of the resurgent themes with many CIOs is conservation of funds; revenue growth has been under pressure for some time, bringing costs back into focus.

In an informal gathering of CIOs this was the predominant theme with everyone attempting to figure out where do they get additional savings from ! Hardware refresh had eliminated maintenance costs for a few years, but now maintenance and support contracts are up for discussion for all the critical and non-critical hardware. Users now expect desk side support for all types of incidents and problems; with rising manpower costs, hardware service vendors and maintenance providers are demanding inflation linked increases.

Last time around there was a flurry of activity around license management; are people really using their allotted licenses ? Thus software license costs were pruned down to the bare minimum required; number of users has gone up now and there is a need to buy additional licenses. Vendors pushed usage audits and attempted to enforce compliance to license agreements putting the CIO in a precarious situation; no one wanted to be non-compliant. Open source again became a discussion with limited success for some.

Back then again contracts for running legacy and custom applications, and maintaining business as usual were trimmed; wherever possible the activity moved to internal resources. Onsite activities were offshored to the service provider’s premises; back office functions relegated to low cost locations in the suburbs. Contracts were examined afresh and brought down to a bare minimum. A few also took the tough step of letting some of their team mates go and reallocated portfolios stretching the remaining team. FUD ruled for a while.

So where do we look for new savings opportunities ? How much more can we do with less lamented the group ? The group had no bright ideas, nor any best practices to share. One of the CIOs present gathered sympathy for a 25% cut imposed on her capital investments as well as operating expenses and still expected to run projects as well as keep the lights on with no adverse business impact. Someone suggested that she conduct an open dialogue with her boss and ask him for ideas on how to implement the cut.

Systematically the group explored some of the options that vendors pitch in as cost savings measures. Is the Cloud with pay-per-use models a viable option ? Variability has been one of the promises from the cloud; but then the proponents of this model cautioned against if cost savings was the primary objective. If you moved existing loads to the Cloud, what would you do with the existing hardware ? It would anyway make sense only if there was a need to increase compute capacity or hardware refresh was imminent.

Can and should total or strategic outsourcing be explored ? That is when most vendors promise 20+ percent savings and projections are locked down for a number of years ! Transfer the accountability and let the vendor figure out how. A couple of CIOs who had been there done that cautioned against it. They have had a harrowing time making some of the numbers in the spreadsheets stick in real life. Legal teams poured over contracts to find a way to make it stick; the CIOs ended up in getting the stick instead.

Most organizations which are driven by ratios and numbers resort to cost cutting rather than cost management in their attempt to keep the street happy. They want to look better than their competitors and keep the stock price high sometimes even at the price of damaging the DNA of the company. Consultants get hired to find hidden costs while they get paid visible money with diminishing returns. I believe that enterprises driven by customers don’t resort to cycles of cost containment and thrive in adversity.

A lone voice in the room asked, “Can we look at increasing revenue instead ?”