cost out - sternstewart.com

1 Cost out HoW to succEssFuLLY cut costscost out HoW to succEssFuLLY cut costsstern stewart Research // Volume 61 Gerhard Nenning, Dimitri Belobokov, Milan Manduch, christian sparrevohnFIVE PINCIPLES 1. "10 -100 -1000": Quickly define where you want to go 2. "Efficient, but ef-fective": Base your approach on well-founded hypotheses 3. "Single source of truth": Quickly ascertain the numbers 4. "Everybody follows the rules": Strictly apply the methods and tools 5. "Get lean and stay leaner": Institutionalize cost awarenessManagement Summary Global competition forces companies to optimize their cost structures even those companies that did not have to worry about price-oriented competitors in the past due to their superior technologies and outstanding product characteristics.

2 Enterprises that combine innovativeness and product qua-lity with low costs are becoming ever more common, causing repeating impacts on the own company and cultural change with regard to its relationship to the outside world. this in turn has the corre-sponding implications for the company's self perception and internal interactions. this transition is particularly difficult for companies, for which costs had previously "never been an issue", and it also comes with its share of risks. cost-reduction programs are often poorly designed: they take too long and are insufficiently co-ordinated, which paralyzes the organization; they are too tentative, so that the people within the company, who fight to retain the status quo prevail; or they depend too much on benchmarks, which reduces their internal acceptance and diverts the focus from the actual sources of potential.

3 Temporary initiatives for a specifically targeted "cost out" are often a more effective way of freeing up cash, capital and resources. What matters is the way a cost out program is structured and exe-cuted. Five principles help make a success of a cost out .. 2015 // ALL RiGHts REsERVED FoR stERN stEWARt & co. 5stERN stEWARt REsEARcH # 61 // cost out HoW to succEssFuLLY cut costs"10-100-1000": Quickly define where you want to go Many cost initiatives generate short-term successes for an organization, but fail over the long term, leaving in their wake a culture of resistance and mistrust.

4 Bottom-line successes can often be seen early on, but after a while these savings are eaten up by a lack of efficiency in critical areas of the company. the root of the problem is most often that top employees leave or that those who remain, at all levels of the hierarchy, are preoccupied with protecting their own destinies, crippling the organization. Program must be strategically logical and understandable cost-reduction measures are always accompanied by uncertainty. the management has to explain why the cost cuts are necessary. Whether it is because there is an acute need to act ("burning plat-form"), the enterprise's competitiveness has to be improved or more growth is desired in the low-cost divisions; the planned actions have to be made understandable to the staff.

5 The entire management must advocate the program, without exception or reservation, and the line managers have to moti-vate and support as good as they can. Quickly define where you want to go and minimize the phase of uncertainty in practice we see it time and time again: A program is announced, followed by a year of procrastina-tion, during which the resistance becomes hardened on all fronts; the social partners feel left out and block any proposal that comes up, the top employees leave the company for safer pastures. Performance indicators essential to success collapse and any savings achieved are insufficient to compensate.

6 The reason for this is that poor process management and an inefficient procedure coincide. Either critical stakeholders are not integrated until it is too late and don't consider themselves to be truly participating, or they are brought in too early and the initiative gets lost in contradictions, misinter-pretations and the chaos of the irreconcilability of different standpoints. the solution that experience tells us works best is having a sufficiently well defined target picture that is determined early on in the piece together with the key stakeholders. this makes a structured, efficient and participative discussion possible.

7 A taskforce a small group (10) of central decision-makers sketches a rough but tangible target picture for the organization after the cost out, quanti-fies and allocates the savings and says what levers are expected to bring improvements, how the changes are to be made as socially acceptable as possible and when and how social partners are to be met 2015 // ALL RiGHts REsERVED FoR stERN stEWARt & target picture is communicated, challenged and refined together with the most important stake-holders (100). only then can a larger group of decision-makers be actively integrated (1000), who are responsible for working out the details and implementation.

8 The 10 -100 -1000 principle has arisen from a broad base of experience with global company groups of course the actual number of stake-holders used in this equation depends on the size of the company and scope of the project. "Efficient, but effective": Base your approach on well-founded hypothesesthroughout the history of cost-cutting programs, three essential approaches or variations on them have predominated, taking turns at being more popular than the others: the benchmark approach the "Activity Value Analysis (AVA)" approach the hypothesis-based approachthey fell in and out of favor, because experience brought the weaknesses of the previously popular approach to light, and the belief in the future was channeled into a new concept.

9 StERN stEWARt REsEARcH # 61 // cost out HoW to succEssFuLLY cut costsFIG. 1: The 10-100-1000 meThodWHoCore team representing top decision makersMost important Lead country heads, Heads of functions heads of functions, country manager, team leaders, of target picture defining key elements of programConcretization of program, final evaluation and development of measuresImplementation lead, feedback, reporting, fine tuning101001000stRAtEGY & toP MANAGEMENt oPiNioN 2015 // ALL RiGHts REsERVED FoR stERN stEWARt & co. 7stERN stEWARt REsEARcH # 61 // cost out HoW to succEssFuLLY cut costsFinding the right balanceso which approach is the best?

10 The answer is as simple as it is inconclusive: All three have their justi-fication in a well-structured cost out project when used at the right time and with a clear understan-ding of their possibilities and limitations. At the heart of successful cost out projects are well-founded potential hypotheses that are then refined during the course of the project. Benchmarking highlights possible directions for the development of optimization hypotheses. it also helps developing a basis for the dimensioning or individual organizational areas and checking the plausibility of the measures.