In times of economic downturn, companies need to act quickly and smartly to help weather the storm. It is important to reduce costs in the short term without hindering growth drivers.
While cost cutting alone doesn’t affect the income statement, consistent measures of controlling costs must be established in order to create a cost-optimal structure in the organization. As soon as the first cost-cutting measures take effect and liquidity is secured, the company must concentrate on securing flexibility and future growth in the medium and long term.
Below we outline four key areas of cost reduction for organizations:
Reduce or eliminate services
As companies tend to do more than is necessary to successfully implement their strategy, central functions are often inflated in phases of growth, when the cost awareness is generally less pronounced. As a result, complexity and bureaucracy increase massively. In times of economic downturn however, fixed costs in particular must be reduced in order to ensure sufficient profitability. Internal services should also be checked in detail in order to be able to define an adjusted but sufficient range of services. This is essential to ensure a balance between supply and demand for internal services.
Adapt service levels
All internal services and service levels for the areas under consideration should be assessed both qualitatively and quantitatively. This creates an assessment of the benefit for each service which can be compared with benchmarks. Services should be prioritized as ‘mandatory’, ‘smart-to-have’ and ‘nice-to-have’. This helps to identify concrete savings potentials, a risk assessment of necessary or unnecessary investments and a detailed description of the reduction in service (such as duration or required changes). In our experience, this information can be used to reduce costs in the short term and over the long term by 20% or more.
A budget freeze for investments and development projects must also be considered in order to ensure a portfolio which is consistently geared towards a return on investment.
Outsource, insource or reorganize
Numerous tasks that are not core to the business can often be carried out by external providers. This means that these services, and therefore costs, can be easily be scaled up or down and reduce complexity within the organization. The required level of service identified above is the basis for a change in the level of each service in order to ensure that costs are comparable.
Before alternative outsourcing, insourcing and reorganization scenarios can be developed, potential external procurement barriers and risks must also be identified, which will later be assessed as part of a business case and scoring model. All dimensions of the new target model need to be part of a comprehensive reorganization program.
Implement cost reduction in a sustainable way
Finally, the internal structures need to be adjusted by reorganizing the relevant areas or departments in line with the changed capacities and process optimization. It needs to be determined which processes are necessary against the background of the service portfolio, then analyzed and adapted. Process benchmarks and KPIs help to indicate potential in order to initiate the corresponding measures. Organizational scenarios are consistently developed, roles and responsibilities are checked, line spans are optimized and overall a process-oriented organizational structure is restored.
After evaluating and selecting a scenario, the organizational units are assigned specific individual services, roles, capacities and specific employees in order to establish an organizational structure that best supports the cost-optimal and growth-promoting service portfolio.
For more information on strategic cost reduction, contact us and a member of the team will be in touch to discuss further.