Cost control' ... and profitability: 'cream pie', the Holy Grail ... but still a major issue, rarely approached in a holistic and methodical way despite the stakes in terms of governance, competitiveness and risks.
Flying is more curative than preventive, which often only makes things worse. How else can we 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 communication (like 'small streams make big rivers') which aims to trigger the Pavlovian saving reflexes.
Some use 'cost killers' that often achieve convincing results, but sometimes at the cost 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, the pressure on costs is not about to ease, with support functions and suppliers in the front line.
Cost control often involves cost transformation: business models must be revised towards greater transparency, simplicity and agility. Given the increasing complexity of processes, the interweaving of systems, 'matrix' organisations, the polymorphous role of IT..., understanding the cost price remains a delicate exercise with the corollary difficulties in steering 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?
By reconciling technology with management control, accounting and methods for modelling, measuring and re-engineering processes: unification of methods, model, vocabulary... How can costs be controlled if it is not possible to determine the relationship with the activities that consume or generate them? How much are they? Why is this so? For whom?
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The objectives of cost management: performance! (*)
Cost control is obviously not just about periodically recalculating a cost price. The solutions must also make it possible to improve processes, to decide on outsourcing options, etc. by offering the following services at all decision-making levels :
- Steering the strategy: performance objectives, budget... Flexibility, responsiveness. Reacting to abnormal, non-linear or decorrelated swelling of certain costs.
- To orient commercial policy by giving priority to the most profitable segments. Give sales staff a sufficient understanding of the costs associated with each segment and activity (whether invoiced or not!), which is a guarantee of profitability and a basis for arguments during price negotiations.
- Benchmarking (measurement of competitiveness), which should be based on a standardised model, following the example of the one developed by CIGREF in France for IT.
- Assess the costs and value created by all activities: operations, support, projects (of all types).
- Understand" and continuously improve the functioning of the company: correct structural anomalies in the weight of support functions or the cost of certain segments, note that certain indirect costs must be "directed"... Detect the effects of "subsidization" between products or customers.
The discourse of the method ... ABC reloaded
In many economic sectors, the increasing complexity of processes means that the cost structure is largely dominated by indirect costs. An Activity Based Costing approach seems 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 second youth. Its implementation, with the IT architecture (DB, ERP, process measures) supporting it, is not a simple task; caution recommends prototyping and running-in through gradual deployment, without forgetting Pareto's law (the 80/20).
Cost management tools
In order to control costs, several types of tools must be used:
- Modeling tools to provide the indispensable 'process mapping' and flow chart. The Lean Six Sigma toolbox.
- Systematic implementation, in all critical processes, of automated probes (a kind of 'tachograph') allowing the measurement of resource consumption while at the same time producing the indispensable statistics ('Big Data') for the behavioural analysis (e.g. detection of variability anomalies) of these same processes.
- Cost accounting. The challenges of granularity and stability.
- Cost measurement methods. Standard costs, marginal cost, ABC.
- Management tools: ERP, ABM, ABB, the "Management cockpit".
- Predictive tools integrating curves of evolution of macro-economic parameters.
- A 'framework' to perpetuate and grow this know-how: governance, methods, automation, operational management tools, appropriation and genetic grafting in the culture of the company...
The implementation of an ERP and ABx are strategic projects that can take 12 to 24 months. They must be the subject of a clear vision and strong involvement of internal customers in order to facilitate ownership.
Reducing costs - Some ideas
Overheads usually cover between 200 and 300 posts divided into five main families (investments, taxation, operations, consumables, services) and multiple deposits that are often interdependent. Dealing with each source requires the commitment of specific resources. A simplification of the business model may be necessary to rid it of customers and/or 'toxic' products.
Reducing operational costs is obtained through process efficiency, simplification, resource management, 'just-in-time'... The main levers:
- Lean Six Sigma to eliminate non-value creating activities, reduce variability, improve performance and quality.
- Economies of scale, bearing in mind that they are not a universal panacea since they are sometimes paid for by a loss of flexibility.
- Cloud computing" to avoid over- or under-capacity and transform fixed IT costs (CAPEX) into operating expenses (OPEX).
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Reduction of structural costs imposes the flattening of the said structure and therefore the stripping of certain layers of the flow chart. Sometimes it takes political courage to abolish honorary positions or merge teams with similar activities but in different directorates.
Reducing coordination costs. Reunionitis is symptomatic of organizational deficiencies. An unclear organization chart, diluted responsibilities, ill-defined procedures... 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!
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 it is still necessary to know how to model, standardise, aggregate, exploit (BI)... 'Big data could be a big investment': there is no point in renting petabytes (millions of gigabytes) from a provider offering 'cloud comouting' services, if it is to pile up layers of data with imprecise and sometimes redundant outlines.
Various IT projects will have to be launched 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 an architecture, it is essential to define the business objectives as well as the IT and organisational resources to be used. We cannot manage what we cannot measure, but we cannot measure everything...
Sustainability - Cost Governance
As with quality, cost management requires awareness and grafting into the company's DNA, without sinking 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 is also based on an evolution of the role of Management Control, which can no longer confine itself to a role of budgetary orchestration but should 'monitor' all the vectors (not only accounting vectors) that create performance and control their cross-dependencies. The MC must be the 'owner', the guardian of all cost calculation methods, including those relating to the costing of IT resources and projects: the MC acts as a sentinel and facilitator to define alert thresholds, centralize, consolidate, homogenize reporting ... to redistribute it to Managers at all required levels.
It remains to be seen whether it has the room for manoeuvre, tools and resources to carry out all these missions at the same time and trigger optimisation actions.
"Banks ability to prepare cost model for tomorrow will differentiate winners from losers". Roland Berger.
Bernard Timmermans, executive of strategic-pilot.com