Managing Cost: Skate To Where The Puck Could Be, Not Where You Think It May Be

How would you change your business if your profits were cut by 50% overnight? That is a question a lot of companies are asking themselves as the global economic landscape continues to change in 2010. No one can really predict with any degree of accuracy what will happen to the economy, politics or the markets next year, but that doesn’t mean leaders and managers shouldn’t be thinking about their cost base now, especially as we go into the new year.

I’ve spent years planning budgets and forecasting revenue for my business or that of clients. We were pretty good at it, you have to be if you want to be successful, but we were never 100% accurate when you look back. You can’t be. But one year we did something different. Planning for the coming 12 to 18 months, it became apparent that the business had a potential problem that, in the worst case, could halve profits. The team had done some work to determine how they could reduce costs if the worst case was to happen. Despite recent actions we had already taken to offset the effects of the recession (last one), the exercise helped us discover several interesting new ways in which we could more than cover the potential shortfall.

And here’s the interesting thing: looking back on the decisions we made that year, many, if not most of the ideas can be applied to an existing business whether or not the worse case happens.

So why do business leaders wait until there is a real crisis before taking the steps necessary to create a more valuable, higher performing company, and what can be done about it?

We learnt five proactive steps to help stay on top of our cost base no matter what:

Have an owner’s mindset. Business owners do not allow unnecessary costs to take root and this attitude, if shared across a business, can add significantly to performance and profits. The best way for your team to have an owner’s mindset is for you to lead by example. This means communicating its vital importance, holding yourself publicly accountable, following up on ideas and being relentless in execution. Too many leaders do the opposite. I worked for a software company that had an unwritten policy that Executives could travel business or first class. What kind of behavior does that policy drive? What do you think people think when the CFO asks for lowering costs but flies First Class? Have the owner’s mindset and lead by example.

Have a vision, not just a crisis. People will not act on bad news alone. You must also be able to share a view of how removing these costs will help you and the organization build a better future for customers, employees, partners and shareholders. This may feel trivial, but don’t underestimate the important of vision. I was once on a boat that lost all communication and energy for an hour. We had no clue where we were or where we were going. People feel exactly the same way when the company doesn’t have a clear, concise, spelled out vision. That vision enables you to bring perspective to why you are cutting cost, or making an important decision that impacts people.

Ensure top-level alignment. Employees can smell a split executive team from a mile away. I was once involved in a cost reduction exercise where half the executive team only gave it lip service. Unsurprisingly, little real change was delivered and, as a result, a much tougher program had to be introduced – including some leadership changes – 12 months later. Leaders, especially CEO’s, have a responsibility to ensure their management team are committed to the plan. The best leadership teams I have worked with are the ones who can disagree behind closed doors but are 100% aligned when they leave the room. I worked for a Managing Director in Europe once who made a decision I disagreed with with all my heart. Yet because he was in charge and it was his call, I went with the decision and gave it my commitment. I talked to my team about the plan, addressed their concerns and questions, and we made it happen. Turned out the decision was right and we, as a team and an organization, were better for it.

Share the real story. If people have valuable information, they are much more likely to take action. So, what are the metrics that you use across your business? How do you create transparency around your unnecessary costs? And how do you establish accountabilities for cost and performance? Remember Manuel, the would-be entrepreneur from my blog on December 1, 2009, The Thing About Leadership Its Never About You? Manuel was all about hiding the real story from the very people on his team that needed to execute his plan. It creates an atmosphere of mistrust and gets you no where fast, as Manuel found out.

Keep raising the bar. In the modern business world of continuous and unpredictable change, merely maintaining a particular cost standard means that you will be going backwards. You must, instead, expect to increase your operational efficiency and reduce costs relentlessly. This means creating a routine of proactive cost management. Think of it as establishing a new health and fitness regime, and avoid it becoming a series of crash diets.