Controlling costs has become one of the topmost pressing issues for business leaders today. As companies prepare for an uncertain future, they are trying to maintain lower spending levels and in fact have a new appreciation for how lean they can be in certain areas. However, a common mistake leaders make is to cut costs across the board especially in time of crisis as the current period. What is required instead is the ability to differentiate between good and bad costs and align the cost structure to support the strategy.
Equally important in the preparation for the next years is to shift their budget and spending to invest in strategic priorities and capabilities driving growth. The costs allocated for this fall into the ‘good cost’ category. On the other hand, costs that no longer contribute to creating value for customers fall into the ‘bad cost’ category and must be systematically reviewed, scaled down or eliminated. This is best done by deploying the “Zero Basing” approach.
We highlight below 6 levers for effectively managing your cost structure. The first three usually receive obvious management attention, while the latter three are areas that are often overlooked which can provide additional perspective for cost reduction:
We believe that a narrow focus on controlling costs can often stifle innovation and active search for growth opportunities. A recent research study confirms that firms that under-invested for too long are unable to fully capture the pent-up customer demand when it returns, which eventually hampers their revenues. Leaders can further uncover new opportunities with a change of perspective i.e. by redefining the problem and view it as margin improvement (which is the ultimate objective) instead of cost reduction. This can be looked at from a combination of 3 lenses:
By widening their perspective leaders can effectively manage the dual priorities of building a cost advantage along with driving growth. The key questions therefore for strategic inquiry are:
There is no quick or easy fix - it depends upon how leaders decisively act upon potential areas highlighted above to realize immediate goals as well as simultaneously prepare for tomorrow’s results.