A recent article in the McKinsey Quarterly noted that it is often difficult to make cost cuts stick, especially when the economy is improving, and that only 10% of cost reduction programs show sustained results three years later. To try and improve the situation, they offered us five ways CFOs can make cost cuts stick, which, briefly, were:
- Assign accountability at the right level
Make sure the people actually spending the money are accountable for how it is spent, and that their compensation is related to how well they adhere to the initiatives.
- Focus on how to cut, not just how much
Set policies and procedures that are in tune with desired spending behaviours.
- Don’t Let P&L accounting data get in the way of cost reduction
P&L categories don’t give the kind of per-unit insights that help focus cuts in specific categories, like travel expenses, that the company can most afford to cut.
- Clearly articulate the link between cost management and strategy
Strategy must lead cost-cutting efforts so managers can deliver a consistent message on how the identified cost reductions will strengthen the company.
- Treat cost management as an ongoing exercise
It’s not a one-off exercise driven by the need to manage short-term profit targets, but a long-term initiative designed to build a competency in cost management.
And these are all great ways to control costs and maintain cuts, but I think the real key to making cost cut sticks is to cut what needs to be cut. If you cut what needs to be cut, then the cut is a justifiable and defensible one. This makes it easier to articulate the link, focus on the how, treat cost management as an ongoing exercise, assign accountability, and bypass the P&L as you go straight to the data source.