Monday, February 06, 2017

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 !

1 comment:

  1. Hey,
    Thanks for sharing such an amazing and informative post. Really enjoyed reading it


    Apu :)

    Cost Containment Companies