Cost Management: A Simple Complication!

To successfully ascend a mountain, you must always lessen your load! By Charles Henshaw
It is my firm belief that every company can save a substantial amount of their operational expenditure by adopting regular cost reduction exercises based on a structured methodology. This should include a process of identification, risk analysis, action plan, implementation and, finally, re-assessment. And then ultimately creating a company-wide cost awareness philosophy. Throughout my long and varied career in telecoms working overseas for an international vendor and a mobile operator, I have been faced on numerous occasions with the daunting task of cutting cost mainly for financial improvement but once for sheer survival! In every case, the exercise was successful and the set goals were achieved. Within the scope of this compact white paper, I would like to share some of my insights into this complex topic of cost management based on a methodology which, I feel, is the key to success. Spend but spend wisely! An adage that was popular in my last company as CEO. Easy to say but the implementation can be a great deal less straightforward. My first approach when faced with the exercise was to focus on two main elements: firstly, to reduce expenditure as quickly as possible through a tried and tested methodology and secondly (and more difficult!) to instil a philosophy of cost management within the entire company: from the top execs to the most junior staff. With this approach, cost reductions can be permanent and not liable to regress. So lets start with my basic methodology: Identification This should be done, primarily, through benchmarking. Analysing cost increases from month-to-month, quarter-to-quarter and year-toyear will show the trend of the increases. Assess which costs are turnover driven. Make sure that the cost figures show exactly what is required. Lumping costs into bulk or similar items might help when preparing accounts but can disguise the real culprits. Never take a cost item for granted if it appears to remain constant over the years or perhaps increased at a reasonable rate. There might be new technologies or products on the market which can be a cheaper solution. Dont be fooled by the so called untouchable cost elements e.g. insurances, inventory stores. There can be substantial savings by focusing on these types of items and really understanding the minutest details. For example, is the asset insurance based on the previously invoiced capital expenditure or on current day replacement value? Are the items in the inventory warehouse really necessary or just rainy day items that take up valuable space and add to the overall insurance premium? Or worst still, are these items redundant or obsolete and harboured by sentimentalists? I would, indeed, be negligent and completely unrealistic if I failed to mention the identification of staff reductions. I could write a book about this subject rather than a mere paragraph! My initial direction is always pointed towards hierarchal, steeped organisation or better known as kingdoms!! Ive often been quoted as saying that human-ware is the nucleus of any business. However, getting staff levels correct for an organisation requires the precision of a surgeon and the strategic planning of a chess master! In my experience, the knee-jerk reaction of company-wide slashing or the freezing of salaries, eliminating bonuses or the removal of benefits leads to an overall demoralisation of the entire workforce. In reality, the focus should be more on the elimination of unnecessary or duplicity of work functions that have been lurking under the radar for too long. To my mind, if there are too many interdepartmental interfaces then merge the departments! Simplistic? Maybe, but effective especially when the victorious department head is rewarded for his extra duties. Loyalty and cost saving in one stroke! Also, efficiencies gained in a modified procedure will bring rewards provided that the manpower reduction is truly absorbed. Risk analysis Naturally, with any cost reduction programme there is a danger that service or product quality would deteriorate leading to a reduction in customer relations and possibly loss of business. Every cost reduction proposal must be thoroughly and microscopically examined to highlight all the ramifications. Once these consequences are quantified, an assessment can be made on their impact post-cost reduction. The outcome must be a conscious and objective management decision whether to proceed or not. As a word of encouragement, many customers will appreciate a suppliers cost reduction programme and, provided

that they are informed, will be sympathetic and, likely, supportive. Remember, its better to have a strategic supplier with a policy of being lean and mean than dropping service levels or even going bust! Action Plan The final stage before the green light is illuminated. Usually, the action plan is a straight forward understanding and (essentially) agreement on precisely what has to be done, by whom and when plus, of course, the anticipated results. It is also good to have a backup plan or alternative options. With staff issues, additional complexities emerge and a sensitivity analysis is a useful tool. Strength, courage and determination are characteristics that should be in abundance whilst leaving emotion a little to one side as this can jeopardise a logical and important decision. Implementation Essentially, putting into effect the Action Plan. I must emphasise here that in many cases this stage requires a cool head coupled with total conviction, unwavering tenacity and, undoubtedly, perseverance. Mutinous and rebellious comments will likely filter down the corridors from unconvinced staff but determination and sheer resolve must prevail. Candid communication to staff on these actions will help to garner support and enlist their cooperation. Re-assessment In cases where an alternate or cheaper product has been purchased then the financial results may be quickly seen. Needless to say, the quality aspect might take longer to manifest. Where new procedures or organizations have been adapted, the financials might take longer to materialise yet the service level could waver quite rapidly in the interim. Nothing should be cast in concrete. If a cost reduction project does not reap the intended benefits then it should be modified or, in the worse case, reversed. Constant monitoring of costs and quality is a key factor which will help to avoid gradual any undoing. Apart from the above methodology there is another important aspect of cost containment and that is the creating of a Cost Management Philosophy throughout the company. This is a further topic worthy of its own volumes. I cannot stress hard enough the seriousness of pursuing the establishment of a staff culture that can generate the thoughts and ideas which will result in cost reduction. Regular lines of communication, staff empowerment, reward systems, training courses, are some of the actions that can be taken. Lets be honest, everyone knows how to save money but there is a genuine human reluctance to do so in case the result ends up negatively. Saving basic items such as electricity,

paper etc should be everyones credo. But there are ways and means to achieve even more positive goals especially if staff can see that their efforts are being rewarded. A simple change in an operational procedure can save money. However, the initiator might not be inclined to suggest such a change unless there is suitable reward through recognition, promotion or benefit in kind. I would always prefer to see a form of on-going cost reduction programme that can chip away or halt spiralling costs with positive staff participation. However, this process takes time and time is an element often not in abundant supply but I believe that it is one that should be firmly incorporated into every companys culture. Cost management is not really a complicated subject nor is it simple. It is sometimes sensitive and often emotional with pressure up and down an organisation. Generally, it is not normally part of a companys core business. But it is increasingly being seen as an essential element of a profitable business world. Being lean and mean is a buzz phrase often banded about but rarely, genuinely achieved. Cost reduction programmes have traditionally been associated with drastic cut and thrust actions, kneejerk decisions and wide spread staff demotivation and demoralisation and yet it doesnt have to be like that at all. A cost reduction programme is more likely to succeed with the implementation of a strict methodology and the frank interaction and dialogue between shareholders, management and staff that, in turn, will create the embryo of a company-wide cost awareness philosophy. Further development along these lines will see a self-generating cost containment vehicle emerging from the very soul of a company that will, eventually, benefit all concerned parties. Win-Win-Win will always win!
If you would like to know more, please contact Charles at The Old Rectory Capital Investment Ltd Email: cghenshaw@gmail.com
Charles Henshaw worked for Ericsson for 20 years in Saudi Arabia, Oman, Malaysia and Hong Kong. He started as a project manager installing one of the first NMT systems and ended his career with Ericsson in Hong Kong managing the Mobile, Fixed Line and Transmission businesses. In addition, he controlled the infrastructure support function, Training Centre and Quality Assurance. In 1998 he joined Peoples Telephone in HK as CTO and later became its CEO. In 2004, he helped Peoples to go public with an IPO and became CEO and Director. Peoples was purchased in 2006 by China Mobile and later renamed China Mobile Hong Kong. Charles remained at China Mobile HK as CEO & Director until he decided to return to UK in late 2009 after 33 years working overseas and founded his own Venture Capital Company.