The Cost Saving Ritual

As many businesses realise how bad the world is and that it is not getting better any time soon, there will be a laser-like focus on cutting costs and manageing them closely.

I have been around this cost-cutting cycle a number of times and noticed, at least in the financial services world I have been in, a repeating ritual. One that it seems one has to go through and complete before costs are seriously reduced.

By way of background I ran business management for a gobal trading and broking business.The guy I worked for was the archetypal and ultimate accounting professional and working for him I pulled together all the financial plans. He showed me initially, but I subsequently confirmed many times that the total cost of that business (excluding discretionary bonuses) was pretty consistent multiple of front office personnel cosst ie salaries and related taxes. I don't recall the exact number, but it was something like x2.5 and covered the costs of all direct support areas and allocations.

Higher salaried staff tend to generate more business, need more support, have more expenses, etc, etc. The ratio does tend to work!

I realise that other businesses will have different dynamics, but I am pretty sure that there will be some prime driver in each.

The relevance is that it comes into the third step of the ritual.

The first step of the ritual is this: "Count the paper clips!"

What this means are the trivial steps that don't hit people hard. Examples the move to use recycled paper, make ordering stationery harder,rations pens, charge for coffee make all travel "cattle class" and hotel limited to budget brands. While these send a message and can on the face of it save a little money, the administrative costs erode and savings and the lost goodwill from staff will lead to unexpected costs or work arounds.

The second step usually follows soon after the first and certainly once the lack of initial impact is recognised and that is: "Point the finger!"

This usually means scrutinising everyone who charges you directly or through allocations. This starts by argueing about the basis of cost transfer ie a % or based on headcount or something else. Once this is done the next stage is to reduce use of those support services and thus avoid some allocated costs.

The allocation arguments are usually unproductive in any substantial way as the costs of the originating units have to be recovered. Initial victories in pushing costs to other business units just prompts them to start the same arguments resulting in what is generally a nil sum game ie overall no-one wins or loses.

Reduced use of services can again look attractive, but generally if the service is needed then it has to be supplied some how. For example, reduced use of a corporate travel desk to book and manage travel often results in an additional PA here and there, negating savings.

Another way is to look to alternative suppliers eg outsource the work. This can appear attractive initially especially when looking at lower cost locations, but in the end this also introduces another party looking to take a profit from work and creates new governance roles. It often reduces flexibility that creates other costs. Additionally rapid wage inflation in countries such as India and China is quickly reducing the simple economic attraction.

Only once the first two steps have been taken, painfully and unsuccessfully will the company take the third and necessary step: "Reduce the cost drivers"

In my personal experience that meant reducing traders and sales people. With them gone there was an immediate significant cost reduction, but also it was not long before further savings came as the number of people needed to support them could be reduced.

Of course there are "reorganisation" costs that have an upfront impact, but in the end the only way to deliver sustainable savings is to tackle the cost drivers.

So watch for the ritual. I am not sure that one can avoid the first two steps, but at least try and complete them as quickly as possible with the least damage so that you can address the real issue - cut to the chase!