Cost cutting – it’s a goal that nearly every company aspires to achieve. However, unlike other areas of business improvement, there is no public playbook on how to accomplish these desired targets. Whether a firm is undergoing a full restructuring plan mandated by a Chapter 11 filing, maximizing the profit and loss statement prior to a divestiture or preparing for a potential economic downturn, effective cost savings initiatives require deliberate action.
The process of implementing a cost savings initiative involves three main stages:
- Setting Objectives
- Tracking Cost Savings
- Executing the Plan
In this blog, we will delve deep into each of these stages, providing a practical guide on what to expect and sharing best practices for each step.
Setting Objectives
Cost savings goals can be established using a common employee development tool known as SMART goals. Applying the SMART goal framework (i.e., Specific, Measurable, Achievable, Relevant and Time-Bound) to develop a roadmap for cost savings can be advantageous as it helps avoid common pitfalls during the implementation process, such as a lack of transparency and accountability.
Here are some guidelines for setting clear cost savings goals:
- Measure the savings as an annualized impact. This approach eliminates the timing aspect of the savings and aligns with how lenders and investors analyze cost savings. While the goal for savings should be based on annualized savings, it’s important to track and manage both the annualized and in-year savings.
- Set targets based on the actual financial impact instead of using percentages or margin improvements. Expressing goals as “reducing logistics by $5M” or “reducing SG&A headcount by 100” provides specific and measurable targets.
- Agree upon a timeframe for achieving the savings. Without a deadline, the goal becomes vague and allows for indefinite delays in action. Setting milestones along the way helps track progress and maintain motivation.
- Anticipate offsetting impacts. Most cost savings initiatives do not solely benefit the bottom line by 100%. There are often offsetting costs that partially negate the impact, such as higher costs from consolidating facilities in an individual location or investing in hardware or software to replace labor. Clearly define whether the target is gross cost savings or cost savings net of any offsetting impacts.
Tracking Cost Savings
The ability to measure the impact is crucial for effectively executing cost saving initiatives. Fortunately, common programs like Excel can be used to create templates and trackers with the necessary functionality.
Here are some best practices for tracking cost savings:
- Designate a person or team responsible for managing the savings tracker. It is imperative that everyone agrees on the tracker as the single source of truth for measuring and reporting cost savings. Different sets of numbers being distributed can lead to confusion and lack of trust. Ideally, someone from Finance or Business Development should be responsible for maintaining the tracker due to the sensitivity of the information it contains.
- Create separate trackers for each cost category. Labor, facilities, technology costs and cost of goods sold (COGS) may have different measurement criteria. For example, for labor savings, you might track employee/position details, compensation items, severance, profit/cost center, timing, etc. For software, you’d include information like license term, renewal or cancellation month or alternative software costs.
- Label or number cost reduction initiatives. Some cost savings initiatives cut across multiple expense types. For instance, dissolving an unprofitable brick-and-mortar retail location leads to savings across labor, facilities, inventory, licenses and more.
- Establish reporting mechanisms for stakeholders and senior management. Tailor the format to suit business needs, including numerical data, charts and graphs that present information clearly and concisely. Use measures like “Achieved” and “Target” to measure progress effectively. Schedule regular meetings to discuss metrics, providing an opportunity to address potential challenges, explore new cost saving opportunities and align strategies across departments.
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Executing the Cost Savings Plan
Once the goals have been set and tracking mechanisms established, executing the cost savings plan relies on assigning responsibilities, overcoming challenges and maintaining focus and morale throughout the process. Poor execution can have severe consequences for employee morale, customer satisfaction and lender/investor confidence.
While each business will have its unique approach to realizing cost savings efficiently, here are some recommendations for success during the execution stage:
- Communication is critical for morale and success. Cost savings should not be seen as only executive action. Execution is achieved by those on the ground, and it is essential for employees to feel they have the necessary resources and training to navigate upcoming changes. Clearly communicate the rationale behind cost saving initiatives and how they contribute to the organization’s overall success.
- Look beyond headcount. Explore opportunities for cost savings through strategic supplier and vendor management. Regularly evaluate contracts, negotiate better terms, and seek competitive bids to optimize procurement. Leverage technology and automation tools to streamline processes and identify areas where manual tasks can be automated, saving time and resources.
- Assign responsibility and accountability. Identify individuals or teams responsible for executing specific initiatives. This helps track progress and ensures that each action has clear ownership. Establish a communication framework that facilitates seamless information flow between team members and stakeholders/management.
In conclusion, having a well-developed cost savings plan is crucial for maintaining a company’s financial health or working towards specific targets. The key to success lies in setting structured and well-defined goals, creating clear tracking tools and mechanisms to report data accurately, and engaging employees in a respectful and inclusive manner. By fostering a cost saving culture, businesses can view cost savings as an ongoing journey rather than a one-time endeavor.
Remember, achieving cost savings requires intention and deliberate action. By following these guidelines and best practices, companies can effectively develop, track and execute cost savings initiatives, driving financial efficiency and sustaining long-term success. If you need support, we can help! We invite you to explore our business stabilization consulting services by clicking the image below:
