Cost control': 'cream pie' but still a major issue, rarely approached in a holistic and methodical way, even though it covers an enormous competitive advantage as well as 'all-risk' insurance. Management is more reactive than preventive, which often only makes things worse. How else to explain the wave of 'social plans', 'restructuring' and other social engineering actions. Many managers rely on the Coué method or attempt emergency braking by launching a frantic hunt for 'wastage', itself stimulated by incantatory and hypnotic communication (like 'small streams make big rivers') which aims to trigger the Pavlovian saving reflexes.
Some people use 'cost killers' which often obtain convincing results but sometimes at the price of poorly controlled collateral damage (e.g. loss of talent): 'emergency braking' can make you skid...
Even if an economic upturn seems to be taking shape, cost pressure is not about to ease, with support functions and suppliers in the forefront. Nearly one-third of the banks in the top-25 announce plans to reduce costs by 6-7% by 2014-2015, while others have less ambitious or even vague targets for nearly 40%. Cost control often requires cost transformation: models need to be revised towards greater transparency, simplicity and "agility". Given the increasing complexity of processes, systems integration, matrix organizations, the polymorphous role of IT..., understanding the cost price remains a delicate exercise with, as a corollary, difficulties in piloting the strategy, assessing profitability or simply drawing up a price offer! The cost model is not static but preparing for the worst can only expose you... to good surprises!
How to control costs?
Reconciling technology with management control and cost modelling and process re-engineering methods. How can costs be controlled if it is not possible to determine the relationship with the activities that consume or generate them?
Cost control is achieved in particular by installing sensors to automatically measure the behaviour of processes: capacity, maturity, units of work, lead time, etc. Of course, by trying not to build or transform a 'gas factory', by capitalising on what already exists without reinventing the wheel; you don't have the time, the hunt for costs is often urgent. Several types of actions need to be taken simultaneously:
- If necessary, translate the strategy into numerical targets.
- Model the company. Process mapping.
- Measuring processes. Loads, capacity, lead time, maturity.
- Calculate costs by selecting the right method. Activity Based Costing.
- Scan. The intangibles, the skills. ERP. CRM.
- Control costs. Cockpit management. Activity Based Management. Activity Based Budgeting.
- Reduce costs. Lean Six Sigma.
- Sustainability in governance and culture. Ownership.
This implies coordinating several types of actors: the Executive, the Controlling Office (CFO), the IT Department, the Organisation, the PMO... A logic of projects, investments, a master plan, an Architect...
The objectives of cost management: performance!
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Cost modeling is no longer just about costing once every two years. Beyond their ability to make costs readable, solutions must make it possible to improve and optimize processes, to decide whether or not to outsource certain functions. Cost management must offer the following services at all decision-making levels :
- Steering the strategy, the performance objectives, the budget. Flexibility, reactivity. Reacting to abnormal, non-linear or decorrelated swelling of certain posts.
- To orient commercial policy by giving priority to the most profitable segments.
- To enable prices to be determined as accurately as possible, not only according to the product but also according to the customer segment (customer/product pair).
- Assess the expenses and the value created by all activities: operations, supports, projects (of any type).
- To give sales representatives sufficient knowledge of the costs associated with each segment, which is a guarantee of profitability and an argument during tariff negotiations.
- To "understand" the functioning of the company and to correct, for example, structural anomalies in the weight of support functions or to note that the FO spends too much time doing OB... for the benefit of a single segment and that certain indirect costs must be requalified. Detect the effects of 'subsidization' between products or customers.
The Cost Nebula
Overheads usually cover between 200 and 300 items divided into 5 main families: investments (IT, real estate, R&D), taxes and duties, operations, consumables, purchased or leased services. The 'costs' have their source in multiple sources that are often interdependent:
- Production costs.
- Costs of raw materials and services purchased or leased.
- Structural costs (Mexican army, fragmented processes, diluted responsibilities).
- Coordination costs brought about in particular by ill-defined responsibilities which provoke the meeting.
- Direct and indirect financial costs. The cost of money.
- Costs related to non-quality or organizational deficiencies.
- Direct and indirect costs of IT projects. TCO.
- Opportunity costs (substitution, renunciation, project delays).
- Distribution costs (marketing, advertising).
- Imbalances between needs and resources (IT, HR...).
Treating each deposit requires specific means. A simplification of the business model may be necessary to rid it of customers and/or 'toxic' products.
The discourse of the method ... ABC
In the financial sector, given the complexity of the processes, the cost structure is largely dominated by indirect costs. The ABC type approach should therefore be used, but it would only be used by a little more than 50% of institutions: a paradoxical situation insofar as this method is unavoidable:
- To determine and quantify the 'true' cost drivers.
- To measure the different revenue streams (products, customer segments, business lines, etc.).
- To analyze operational performance and detect malfunctions.
- To steer the company according to a 'business' view rather than inspired by the organization chart.
The foundations of this method date back to the 1980s, but IT has given it a new lease of life, enabling it to be used by SMEs in particular. Its implementation, with the IT architecture (DB, ERP) that supports it, is not a simple task; caution recommends prototyping or running-in through gradual deployment. Four key steps:
- Definition of strategic objectives, expected benefits.
- Process mapping, the foundation of all management tools.
- The measurement of consumption and allocation of resources in a transparent and accepted manner.
- Systematic implementation of automated and documented probes (tachographs) in all processes to capture and model the measuring elements.
Cost management tools
In order to control costs, several types of tools must be used...
- Modeling tools to provide the indispensable 'process mapping' and the flows between them. The Lean Six Sigma toolbox.
- Cost accounting. The challenges of granularity and stability.
- Cost measurement methods. ABC.
- Process measures: work units, capacity, maturity, lead time, quality.
- Management tools: ERP, ABM, ABB, the "Management cockpit".
- Predictive tools (simulations), integrating curves of evolution of macro-economic parameters.
- A 'framework' to perpetuate and develop this know-how: governance, methods (lean six sigma, ABC/ABM/ABB), systematic automation of measurements, database, operational management tools, appropriation and genetic grafting in the company's culture...
The implementation of an ERP and ABx are strategic projects that can take 12 to 24 months and represent an investment for 10 years. They must be the subject of a clear vision and a strong involvement of internal customers, in order to facilitate the appropriation by a chosen adoption rather than an undergone one.
Reducing costs - Some ideas
The reduction of operational costs is achieved through the fluidity of processes, economies of scale, simplification, adjustment of resources to needs. The main levers:
- Lean Six Sigma to eliminate non-value creating activities, reduce variability, improve performance, quality, within and between processes (FO / MO / BO).
- Economies of scale, bearing in mind that they are not a universal panacea since they are sometimes paid for by a loss of flexibility.
- Simplification. Elimination of customers and toxic products.
- Just-in-time' / 'Scalability': balance of resources/needs to control variations linked to seasonal effects or arrivals/departures of 'big customers', avoid over- or under-capacity, etc. Cloud computing' to transform IT investments (CAPEX) into operating expenses (OPEX).
The reduction of structural costs requires the flattening of the structure and therefore the removal of certain layers of the organizational structure. Sometimes it takes political courage to abolish honorary positions or merge teams from different directorates.
The reduction of coordination costs. Reunionitis is symptomatic of organizational deficiencies. An illegible organisation chart, diluted responsibilities, poorly defined procedures, etc. will increase the need for coordination and consultation. Managers have no choice but to meet very often to clarify who-does-what-when-when-how-where!
The rent of the money. Late billing or collection.
Information is power ... provided it is accurate & standardized & digitalized !
"You can't manage what you can't measure." Big data' is a fatal weapon, but you still need to know how to create, model, standardize, aggregate, exploit (BI)... 'Big data could be a big investment': there's no point in renting petabytes (millions of gigabytes) in the cloud if it's to pile up layers of data with imprecise and sometimes redundant outlines. Various IT projects will have to be launched in order to gradually clean up the IT system, standardise, digitise the "intangibles" (skills repository, contracts, etc.), measure quality, activities, etc.
Think before you act: before developing such a comic book, it is essential to define the business objectives as well as the IT and organisational resources that will have to be implemented. The credibility of the dashboards and the efficiency of management depends on the quality of the data.
The feasibility of an ABC model is largely related to the availability of data. Particular attention should be paid to this point as early as possible in the project cycle.
The 'lead time' of the processes must be measured continuously to detect any anomaly linked to, for example, the ageing of the systems, the availability of inputs, the increasing complexity, etc...
You can't manage what you can't measure, but you can't measure everything...
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Sustainability - Cost Governance
As with quality, cost management requires collective awareness and a grafting into the company's DNA, without falling into administrative poaching or an inflation of time-consuming reports. The 'management cockpit' must provide real decision-making information, without saturating the 'bandwidth' of the decision-makers with overdoses.
The success of the approach also depends on an evolution of the role of Management Control, which can no longer maintain a budgetary control role but should 'monitor' all the vectors (not only accounting vectors) that create performance and control their cross-dependencies. By taking on the role of sentinel and facilitator to define alert thresholds, centralize, consolidate, homogenize reporting ... in order to redistribute it to Managers at all required levels. It remains to be seen whether he has the room for manoeuvre, the tools and the resources to carry out all these missions at the same time... and to trigger curative treatments: reorganisation, BPR, outsourcing, cloud computing, etc.
Banks ability to prepare cost model for tomorrow will differentiate winners from losers. Roland Berger.
Bernard Timmermans (www.strategic-pilot.com)