The success of any organization is built on a strong financial foundation. Increasing revenue is part of the equation, but finding opportunities for cost reduction is another way to improve profitability. Many small and medium-sized enterprises look first to overhead expenses to detect savings opportunities, yet this “quick-win” approach focused on short-term results could be risky.
For example, deciding arbitrarily to reduce costs overall by a certain percentage compared to the previous financial year or freezing spending in some expense categories could do more harm than good. Also, recognized savings may not be appropriate or relevant to the company’s needs or market conditions. The savings might be unsustainable, and their subjective nature could also generate resistance from staff members.
Successful, sustainable, cost-reduction efforts must be driven by a cost-management philosophy embedded in a company’s culture. This is more than changing budget targets annually. Sharing information about costs throughout the organization, and linking that knowledge to corporate strategy, should be the first step in reducing costs.
Get everyone involved
Developing and implementing a cost-reduction plan involves communication. Everyone must understand and support the cost-savings initiative—employees, managers, and stakeholders. Leaders must inspire ownership of the new spend culture. Clear communication throughout the organization will lead to a cost-awareness mindset.
Know spending patterns
Where are the dollars going? Overhead expenses should be regrouped and scrutinized to create a well-defined picture of spending patterns. This analysis, usually not performed due to lack of time and resources, can reveal overlooked savings opportunities. Mistakes can be costly when discounts are not applied, there are invoicing errors, or the same goods or services are ordered separately by different departments. A spending review will also note other inaccuracies such as unnecessary expenses or redundant stock.
Recognize genuine needs and consumption patterns
Understanding spending patterns (identifying what is ordered and what is used within the company) can expose the strengths and weaknesses of the current process. This makes it possible to regroup requests from different services and locations to leverage purchasing power and achieve better pricing. This analysis may also highlight whether the resources provided to employees (information technology, telecoms, equipment, etc.) are being used properly and to their full potential. Examining spending data can help business leaders reframe and redirect a spend culture, and invigorate efficiency.
Benchmark and develop goals
After spending patterns are pinpointed, benchmarking is the next step. Benchmarking, a quality improvement tool, is the comparison of one organization’s practices and performance to those of others. It seeks to identify standards, or “best practices,” to apply in measuring and improving performance. Benchmarking results should lead to the development of savings goals. Are the targets realistic and doable?
Achievements will need to be monitored over time to document actual savings, to adjust to changes or new requirements, and to ensure that any terms and conditions negotiated are applied.
An effective, sustainable cost-management program requires a strategic approach, combined with a savings philosophy rooted in the company’s culture. Employee engagement efforts, an analysis of spending and consumption patterns, benchmarking, and monitoring results are significant factors that lead to savings.