Why do so many cost reduction programs fail?
Although cost reduction programs can deliver a powerful mix of financial, strategic, and organisational benefits, the failure rates of these types of programs are very high. A recent survey of C-Suite executives, for example, found that while 90% of businesses had attempted to implement a cost reduction program, 75% failed to meet their targets, and 44% missed them by more than half.
Drawing on some of the key insights from our new report, the Agile Cost Advantage, in this article we consider some of the main reasons why cost reduction programs are so difficult to get right.
However, it is important that the targets are calibrated correctly. When targets are arbitrary, the project can be set up for failure from the outset. Targets that are too modest will result in cost reduction programs that do not go far enough. On the other hand, setting targets that are simply not feasible will also result in a sub-optimal outcome. Setting an across-the-board target reduction in costs of 20% may not make sense if a large proportion of the cost base is subject to long-term contracts or structurally inflexible. This will cause a loss of motivation, and a failure to build the early momentum that is so critical to cost reduction programs.
Cuts Go Too Deep
In most businesses, there will be some cost savings that are relatively straight-forward, and can be delivered quickly (examples of such ‘quick wins’ may include consolidating suppliers to get better terms, enforcing better compliance with expense policies, or eliminating some low value-add processes}. However, more significant cost savings typically involve making structural changes to complex processes, or the way operations are configured. Without the necessary operational changes, there is a risk that cost reduction simply becomes focused on reducing headcount without a corresponding reduction in workload, leading to over-stretched staff and poor customer outcomes.
Like any business transformation program, delivery of a cost reduction program can be challenging, with significant risk of failure. Estimates of business transformation failure rates within large organisations range from 50% to 90%. Execution failure can have a number of underlying root causes, including a lack of alignment between key stakeholders, unclear planning, inadequate ongoing tracking of program delivery, and a lack of internal collaboration.
We therefore recommend putting a structured program management process in place to manage the delivery of the cost reduction program. This should include defining clear targets, business cases and project plans for each individual cost reduction initiative, and processes in place to track the ongoing delivery of each initiative. Whilst not everything will go precisely to plan, having these controls in place means you can respond quickly when necessary to get things back on track.
Loss of Momentum
Maintaining momentum requires the ongoing active leadership of the senior sponsor (preferably the CEO / CFO), clear ownership for each of the cost reduction initiatives with a senior executive within the organisation, and having the processes in place to manage and track the ongoing delivery of the cost reduction program.
The Agile Cost Advantage
Position your business for success in the post Covid-19 business environment
Achieving sustainable cost reduction is a critical business objective, especially in the current environment. The near-term economic outlook is bleak, with the IMF projecting the world's worst economic downturn since the Great Depression of the 1930s. At a time when most businesses are likely to see deteriorating market conditions and declining revenue, re-balancing the cost base to reflect the new operating environment could be the difference between riding out the current crisis or becoming another business casualty.
We have spent the last 20 years helping businesses and private equity funds with performance improvement, cost reduction and turnaround programs. For the first time in this ground-breaking report, we share the proprietary approach and frameworks that we deploy in supporting clients to achieve an Agile Cost Advantage.
- Benefits of the Agile Cost Advantage
- Common challenges in achieving sustainable and rapid cost reduction
- How to identify cost reduction opportunities within your organisation
- Overview of the Agile Cost Advantage Framework and Approach