CFOs leading cost optimization movement
- August 1, 2008
By Candace H. Duncan
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 pink slips, finance executives should take a holistic look at their organization to ensure that any changes are strategic and sustainable.
There is no question that the role of the CFO 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. Indeed, with stakeholders expecting
companies to improve performance, enhance revenue, optimize costs and reduce risk, CFOs are under tremendous pressure to deliver.
With this broader perspective, these executives should 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 desired results.
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 easy options for cost initiatives. While budget and headcount reductions provide short term savings, building in process efficiencies can yield more significant and lasting benefits.
Companies also must be prepared to adopt major changes to their business model in order to remain competitive.
Cost discipline is not embedded in the culture – Every employee has a role in cost management, but responsibilities are typically unclear in many organizations. A clear strategy and open communication is vital to the success of any corporate project, but even more so around cost cutting initiatives, where employees understandably can feel threatened
No Quick Fixes
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 over the long term. Similarly,
only executives who take the time to examine the cost structure throughout their business, and imbed cost discipline within their culture, will see gains that can be sustained.
To do this, finance executives need to look at costs across whole processes, not just within functions. Recently, a global industrial products firm embarked on a working capital improvement program that brought savings.
The key to its success? Focusing on core business processes and practices around quote-to-cash, procure-to-pay and inventory management. The firm also introduced a governance process to monitor ongoing improvement and establish ownership and accountability; redesigned the performance measurement system with new metrics focused on
cash optimization; and updated policies, procedures and training.
Ultimately, it means rethinking the entire business model. The result may be taking out whole layers of the organization or supply chain, examining customer interfaces and considering outsourcing, shared services and off shoring. 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, 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 the 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.
Candy Duncan is the Mid-Atlantic Area Managing Partner for KPMG LLP, an audit, tax and advisory firm. She is a resident of Williamsburg.