Cost reduction is easy, cost optimisation is hard.

It does not surprise me  that a lot of people think this. It all seems so obvious and straight forward and the language does not help; often you will hear talk of ‘easy wins’ and ‘low hanging fruit’.  Cost reduction is something that happens when the corporate belt needs tightening or investors start asking questions.

Action plans are put in place and the internal skirmishes begin. Travel spend is attacked and usually business class is scaled back. Plenty of spreadsheets and graphs are produced. A new company car list/stationery catalogue/work wear catalogue is issued, personal calls are billed to employees. The headcount is reduced.

All good busy stuff. Lots of activity to report.

Fast forward to next year and unfortunately far too many companies find that their cost base has not really  improved. Using a sports analogy, you kicked an awful of balls (you cannot beat a good sports analogy!), but you have finished in exactly the same place as you did last season.

The CFO and the CPO glare at each other at board meetings. All those engaging power point presentations cannot explain why all that effort has not hit the bottom line. The CEO has to find words to appease the investors and he really wanted numbers.

Some thoughts:

1. Cost optimisation is too important to leave in just the hands of the purchasing or the finance guys. It is a business issue.

2. Optimisation of cost is not a departmental task. It is the responsibility of everyone.

3. It needs to become a core fundamental belief – not a project to be wheeled out when times are hard.

4. Irrespective of your selling price expectations, you should always be optimising. Always means always, it should never stop.

5. Imagine a company with 500 members of staff and 10 trained purchasing specialists. The purchasers will do their cost reduction bit, as best they can. I have no doubt that good people will – given the resources – make some improvements. Now imagine 500 members of staff all aware of a strategic cost leadership objective, all pulling in the same direction, optimising the cost base to facilitate the delivery of the objective. Imagine what that would do to profitability ?

6. I go on a lot about culture. How it changes every thing within an organisation. If your people do not believe you are serious about optimising costs, it will not happen. I recall a European engineering organisation that spent millions of euros on an externally managed purchasing/cost reduction programme. They decided to leave culture alone (too politically difficult). The savings never appeared.

Cost optimisation isn’t easy. Nor is the ultimate objective of cost leadership. But truly increasing profitability and shareholder value by dining on ‘low hanging fruit’ is a lot harder.