November 15, 2021
Strong leadership is a prerequisite for good cost management. Cost leadership starts with the CEO or business unit head and cascades down through the top management team. They need to build a tough cost culture and be good role models in their personal behavior. They need two key staff functions to be very active supporters of cost control – finance and HR. Imprinting a tough attitude to cost right down through the organization takes true grit.
A Challenging Base Case
Your base case position, what you expect in terms of cost trend, will be a big contributor to the cost outcome.
For example, you can start off the annual budget process by telling your business unit heads that this is a year of prudent consolidation, that they should plan on no headcount additions but a 3-4% increase in cost per head plus some small reductions in bought-in costs, and that with that cost base they should be able to manage some modest revenue growth.
Or you could say revenue growth is looking difficult this year and you’d like to see 5% productivity gains, which means that we plan on headcount coming down by 5%, but you don’t want to see any reduction in the revenue plan.
Those are two very different base case positions. Under the first scenario, management gets the message that they can relax a little, they can tread water, put off nasty decisions, and do some strategic thinking. Under the second, their feet are being held to the fire. There’s no standing still. If they’re not growing revenue, they’d better be cutting costs – either way the base case position is that you expect 5% (or whatever percentage works) productivity growth, every year. If you don’t stay paranoid and keep moving forward, your competitors will overtake you.
Once this kind of base case behavior is established, managers will stop coming to budget reviews with a business-as-usual, status quo budget. They will know that won’t survive one minute in the CEO review. The whole tone of the business will have changed.
When you’re doing a house renovation your builders find out fast if you’re a soft touch. At the end of Week 1 they put in for an extra $10,000 because you’ve altered the handles on the cabinets and obviously that’s changed the entire project. Roll over on that and you’re looking at a $50,000 overspend by the end of the month. But if your base case is “no” and you have them accommodate that in the original budget, you can stop cost escalation.
As a strong cost leader, your base case expectation must be for real productivity gains and other unit cost reductions every year. Repeat that message and stick by it, until it is taken as a given by your management team and pushed down by them to the rest of the organization.
February 1, 2022
Email Etiquette: Taming the Beast
“Because the mail never stops, Jerry! It just keeps coming and coming and coming, there’s never a let-up. It’s relentless. Every day it piles up more and more and more, and you gotta get it out but the more you get it out the more it keeps coming in!” -Newman, Seinfeld Most executives I know …Read
January 1, 2022
Don’t Lose Customers, Forge Elite Teams Instead
I’ve been a loyal Starbucks customer for 20+ years, mainly because of the consistency in their service and product. However, one of the locations close to me nowadays is a true test of patience; horrible attitude towards customers, lack of consistency in drinks and, worst of all, employees backbiting about each other, their superiors, and …Read
December 15, 2021
Negotiating with Suppliers The approach to negotiating with your suppliers is simple: treat them as your partners, be tough but fair, and don’t lock yourself in a situation that is impossible to walk away from. 1. Understand the balance of power: Understanding and playing the balance of power between buyer and supplier is a key …Read
December 1, 2021
Benefits Administration A company’s benefits package can be a very significant part of its total expenses, but in many companies, benefits are not really viewed as expenses. Instead, because of the need to hire and retain top-quality employees, the benefits package is considered a key asset that must be maintained if not increased. While a …Read
November 1, 2021
“If the company’s problem did not lie in revenues, it could only stem from expenses.” -Carlos Brito, AB InBev Simply put, Zero-Based Budgeting (ZBB) is a radical cost-control program that foresees a complete annual revision of all the company’s spending. In zero-based budgeting, managers are responsible for creating their budget from “zero costs” every year, …Read
October 15, 2021
HIRING & FIRING
People Cost The cost of people is the most difficult cost to manage. Because it is so tricky it is usually left until last in any cost-cutting program and any discussion of cost management. Why is people cost so problematic? First, people cost is very sticky. Once people are on the payroll it’s hard to …Read
October 1, 2021
Workers’ Compensation Insurance There are a number of techniques for bringing about modest reductions in the cost of workers’ compensation insurance. Job Classifications: One of the key determinants of the cost of workers’ compensation insurance is the job classifications into which all employees are slotted. An employee designated in a high-risk classification will cost far …Read