Strategy + Cost Reduction = Cost Optimization

20 Apr Strategy + Cost Reduction = Cost Optimization

Revenue – expenses = net income. It doesn’t take a math whiz to understand that reducing expenses increases net income, at least in the short term. But cutting the wrong expenses can have disastrous effects on long-term results.  Either formally or informally, every decision to incur an expense is the result of a cost-benefit analysis. Each time you are presented with an option to spend or not spend money, you determine what benefit you will gain if you spend the money then decide if the value of the benefit is greater than the expense.

Cost reduction involves taking a second look at the recurring expenses that the company has already decided have a benefit greater than the cost. The biggest mistake that leaders can make when deciding which expenses to eliminate is to view the expense within an organizational silo. Transforming cost reduction into cost optimization is done by adding strategy. It means viewing the expense in the bigger context of the organization’s long-term goals and strategy.

Let’s say you are a member of a professional organization and are trying to decide whether to save money by canceling your membership, thus cutting the monthly membership expense. You may look at the cost purely from a sales standpoint and decide that you don’t get that much business out of the membership so eliminating the expense makes sense. What happens if you don’t consider how cutting that expense will impact employees? Perhaps the employees value the professional growth they achieve when they attend the events, or maybe they learn important industry information from member newsletters. You may be unintentionally jeopardizing success in the achievement of your company’s long-term goal of improving employee loyalty by only considering the expense from the sales perspective and ignoring the employee perspective.

Here are three components of cost optimization to build into your strategy.

1. Increase efficiency. Identify areas where efficiencies can be gained in order to eliminate expense. Certain changes can result in savings almost immediately with little or no initial cash investment. For example, implementing Salesforce.com workflows to free up an FTE in a particular area. Or, using a secure electronic document delivery system to eliminate the monthly cost of delivering paper documents.
2. Improve alignment. Take a look at every initiative underway across the organization. Identify which objectives (the key areas where the company must excel in order to achieve the vision) are supported by the initiatives. Any initiatives, and the expense associated with them, that do not support an objective that leads to success should be eliminated immediately.
3. Invest now, save later. Identify initiatives where cost savings can be realized in the mid-term or long-term and then determine the up front cash investment needed for the initiative. Often, an investment on the front end, especially in information technology, can result in positive ROI relatively quickly. For example, by modernizing a company’s IT infrastructure into a unified computing based private cloud, ongoing data center costs could be reduced significantly.

Whether you are looking for ways to increase efficiency, improve alignment, or invest cash up front in order to attain future cost savings, be sure to consider all expenses in the context of the overall business strategy. Cost optimization strategies do not have a singular focus, rather they view expenses from multiple perspectives across the organization to ensure that expense reductions do not result in negative unintended consequences.

Implementing a cost optimization strategy is not a one-time initiative. Successful organizations view cost optimization as a continuous improvement exercise that results in a healthy balance of cost savings and innovation to help the business achieve extraordinary results.