Why do cost reduction programs fail so often

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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. In this article we consider some of the main reasons why cost reduction programs are so difficult to get right.
Cost reduction challenges

The reasons for cost reduction program failure can be complex, and of course depend of the specific circumstances of each cost reduction program. In general though, we see a number of recurring themes behind these causes of failure.

Unrealistic targets

It’s important to set clear targets. When done correctly, the targets represent an ambitious stretch target that can encourage a substantial collective effort to deliver a successful outcome.

However, it’s important that the targets are calibrated correctly.

  • Targets that are too modest will result in cost reduction programs that do not go far enough
  • 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.

Unrealistic targets

Cost cuts go too deep

Cuts go too deep

Cost savings typically fall into two categories:

  • ‘Quick wins’ that are relatively straight-forward, and can be delivered quickly
    (e.g. reviewing travel policies, renegotiating out of contract external spend)
  • Efficiency savings e.g. through structural changes to complex processes

 

Cost programs should target the quick wins, but also ensure there is sufficient time and focus to put in place more complex efficiency measures.

Without the necessary operational changes, there
is a risk that cost reduction simply becomes focused on reducing headcount without a corresponding reduction in workload. This leads to over-stretched staff and poor customer outcomes.

Execution challenges

Execution failure can have a number of underlying root causes, including:

  • Lack of alignment between key stakeholders
  • Unclear planning
  • Inadequate ongoing tracking of program delivery
  • Lack of internal collaboration

 

Cost reductions should be treated like a complex transformation program.

This means putting in place PMO controls and oversight. This should include defining clear targets, business cases and project plans for each individual cost reduction initiative. You should also 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.

Execution challenges

Loss of momentum

Loss of momentum

Over time there is a risk of a a gradual loss of momentum.

Following the initial fanfare of the program launch, often some initial wins are fairly easy to achieve.

But the initiatives become more complex and progressively harder to secure.

Maintaining momentum requires a number of key success factors:

  • Ongoing active leadership by the senior sponsor (preferably the CEO / CFO)
  • Clear ownership for each cost reduction initiatives by a senior executive
  • Having the processes in place to manage and track ongoing delivery

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