Cost Savings vs Cost Efficiency

We recently engaged in discussion on the Financial System News (FSN) discussion on “Role of Finance in Organisation Cost Control“.  Our response to a question posed on the role and accountability of the CFO in cost cutting:

 

Unfortunately, too many businesses that have not focused on running an efficient business end up in the “cost cutting” group when times get tough. For us, the emphasis should move from cost cutting to cost efficiency.

 

Where FP&A and CFO add value is by shifting the conversation to the latter. Any spreadsheet monkey can cut out 5% etc costs from a cost centre or P&L line item, but real business insight tells you the current and future value that that cost adds to your business.

 

Cutting cost to maintain profitability can backfire if efficient costs are removed, robbing a business of ready-to-go support infrastructure when markets recover. This current market fixation on always growing profits is outdated and does not recognise the economic turmoil being experienced globally. Perhaps a stable business delivering robust dividends should be achievement enough at this time? Remember, cost efficiency can sometimes actually require costs to be added. Improving Returns on Capital Employed requires ongoing investment, not just in products but in all of the enabling infrastructure.

 

Cost efficiency is a business-wide responsibility, but the CFO and FP&A team can add real value by using their business partnering skills to help educate and support the non-finance areas of the business in the understanding and daily approach to managing their costs efficiency. They can also add value by presenting cost benchmarking analysis to the business (both internal and external): providing a credible reference on how much things cost allows the business operator to know how far adrift they are from a sensible cost efficiency measure, giving them shared ownership of the problem and a shared benefit from engaging in cost efficiency improvements. Finance risks being seen as an ivory tower with no business insight if it simply issues reduction targets without engaging with the business on an operational level.

 

A more commercial approach to ‘cost saving initiatives’ should always leave a business ready to respond to changes in their competitive environment. For example, when winter’s coming a bear fattens up before hibernating. A skinny bear will die during winter. How many businesses leave themselves spread too thin, unable to adequately service their customers?

 

Cutting their workforce based on a spreadsheet calculation in challenging times can be a false economy. Their core business product or service may still ‘work’, but most customers want more than a cheap price. When a business’s overall value proposition falls short of customer expectations, customers will switch to a competitor. Cutting too many costs can leave a business exposed to poor service levels, increased product failures or lacking in timely after-sales service. Again, focus should be on cost efficiency in the broader sense, not just cost savings.

 

Businesses that look after their workforce in tough times enjoy much higher staff engagement survey scores than the “fire & hire” companies. People will typically respond by working harder, servicing customers better and adding extra discretionary effort to everything that they do when markets eventually recover, a value that is worth far more than the P&L cost code to which they are accounted for.

 

Click here to go to the full Financial System News (FSN) discussion on “Role of Finance in Organisation Cost Control