Reducing Costs: Step Zero – Organize and Prioritize !
Folks get excited about reducing costs: It can be a result in a real, quick sense of achievement. However, you MUST first take a “pre-step” which we call “Step Zero”. Step Zero consists of 1) Organizing the cost-reduction project and 2) Prioritizing individual cost-reduction ideas.
Experience shows that without taking this “step zero”, a lot of energy and effort can be wasted chasing any and all cost-reduction ideas..
1: Organize Your Cost-Reduction Project
As a minimum, three roles must be represented:
- Project Lead is responsible for the outcome and is empowered to make decisions.
- Project Implementer is charged with making a given cost-savings idea happen.
- Business Liason assesses the impact of each cost-savings idea.
Depending on the size of the enterprise, one individual may need to take on more than one role.
Cost-savings MUST be is a high priority. Necessary, time, effort and/or funds time and effort MUST be allocated. Further, there MUST be progress reviews.
This guidance can be readily scaled to the size of your enterprise. In larger organizations, individuals are assigned specific cost-savings projects; multiple business units or functions each may have their own representatives.
2: Prioritize Your Cost-Reduction Ideas
Establish the selection criteria and assess each cost-savings idea against that common criteria.
The key here is to avoid “analysis paralysis”; only assess ideas to the level required to determine whether an idea should be implemented, the level of effort to be expended, and the time frame.
The selection framework is simply benefits and impacts.
Obviously, the key benefit to be gained is saving costs — but what does that really mean? Priority is usually given to recurring savings (that is, savings are achieved year end and year out, for example) vs. one-time savings. It is also important to differentiate between actual reduction of on-going expenses and future expenditures that may be avoided. Lastly, consider “total cost of ownership (TCO)” — a well-established principle to ensure that you include all costs associated with an asset or action over its life cycle. For example, a server with the lowest purchase price does not necessarily have the lowest TCO.
Any potential cost-savings project that is will have an impact across on one or more dimensions — including::
- Expenditures: Often, you must “spend money to save money”: that is, an additional expense or investment is required to achieve a cost-savings. Different initiatives then are likely to have different returns on investment.
- Level of effort: Simply, the personnel time and labor required to implement the project.
- Time to implement: This is when will you start achieving the projected cost savings.
- Operational impact: A cost-savings initiative may require a change to how you perform a function or conduct business. For example, a given initiative may shift responsibility or resources from the business to IT.
Assessment is simply a matter of weighing benefits against impacts. We suggest starting with assessing impacts as high, medium, or low — but expressed numerically say as a 1,2 or 3. Benefits and impacts can simply be summed; you may want to differentiate the relative importance of different benefits and impacts. This assessment can be iterated to any granularity that is required (“required” is the key word here: You want to avoid the “analysis paralysis” trap. Set a specific set date to identify at least the first projects)
Once benefits/impacts are assessed on a numerical basis, there are two additional steps:
- Ask yourself: Does the result pass the “reasonableness test”?
- To choose among projects that have similar scores, review the values assigned and make any adjustments you feel are necessary.
That’s it! Simple, right? To restate: Before embarking on any cost-savings initiatives, establish the team by assigning roles and responsibilities; and prioritize cost-savings projects amongst the myriad of opportunities that could be pursued using a straight-forward benefits/impacts assessment. Project selection can be done at any desired granularity; Taking these pre-steps ensures that the effort will be efficient and effective.
Now you are ready to be a hero by reducing costs in your enterprise!
(Note: The author has employed this approach with literally hundreds of clients organizations and achieving millions of dollars in savings. It works!)