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Cost Management: A Simple Complication!

To successfully ascend a mountain, you must always lessen your load!

By Charles HenshawIt is my firm belief that every company can save asubstantial amount of their operational expenditure

by adopting regular cost reduction exercises basedon a structured methodology. This should include aprocess of identification, risk analysis, action plan,implementation and, finally, re-assessment. And thenultimately creating a company-wide cost awarenessphilosophy.

Throughout my long and varied career in telecomsworking overseas for an international vendor and amobile operator, I have been faced on numerousoccasions with the daunting task of cutting cost mainly for financial improvement but once for sheer

survival! In every case, the exercise was successfuland the set goals were achieved. Within the scope ofthis compact white paper, I would like to share someof my insights into this complex topic of costmanagement based on a methodology which, I feel,is the key to success.

Spend but spend wisely! An adage that waspopular in my last company as CEO. Easy to say butthe implementation can be a great deal lessstraightforward. My first approach when faced withthe exercise was to focus on two main elements:firstly, to reduce expenditure as quickly as possiblethrough a tried and tested methodology and secondly(and more difficult!) to instil a philosophy of costmanagement within the entire company: from the topexecs to the most junior staff. With this approach,cost reductions can be permanent and not liable toregress.

So lets start with my basic methodology:

Identification This should be done, primarily,through benchmarking. Analysing cost increasesfrom month-to-month, quarter-to-quarter and year-to-

year will show the trend of the increases. Assesswhich costs are turnover driven. Make sure that thecost figures show exactly what is required. Lumpingcosts into bulk or similar items might help whenpreparing accounts but can disguise the real culprits.Never take a cost item for granted if it appears toremain constant over the years or perhaps increasedat a reasonable rate. There might be newtechnologies or products on the market which can bea cheaper solution. Dont be fooled by the so calleduntouchable cost elements e.g. insurances,

inventory stores. There can be substantial savings byfocusing on these types of items and really

understanding the minutest details. For example, isthe asset insurance based on the previously invoicedcapital expenditure or on current day replacementvalue? Are the items in the inventory warehousereally necessary or just rainy day items that take upvaluable space and add to the overall insurancepremium? Or worst still, are these items redundant orobsolete and harboured by sentimentalists?

I would, indeed, be negligent and completelyunrealistic if I failed to mention the identification ofstaff reductions. I could write a book about this

subject rather than a mere paragraph! My initiadirection is always pointed towards hierarchalsteeped organisation or better known as kingdoms!Ive often beenquoted as saying that human-wareis the nucleus of any business. However, getting stafflevels correct for an organisation requires theprecision of a surgeon and the strategic planning of achess master! In my experience, the knee-jerkreaction of company-wide slashing or the freezing osalaries, eliminating bonuses or the removal ofbenefits leads to an overall demoralisation of theentire workforce. In reality, the focus should be more

on the elimination of unnecessary or duplicity of workfunctions that have been lurking under the radar fortoo long. To my mind, if there are too many inter-departmental interfaces then merge the departmentsSimplistic? Maybe, but effective especially when thevictorious department head is rewarded for his extraduties. Loyalty and cost saving in one stroke! Alsoefficiencies gained in a modified procedure will bringrewards provided that the manpower reduction istruly absorbed.

Risk analysis Naturally, with any cost reductionprogramme there is a danger that service or producquality would deteriorate leading to a reduction incustomer relations and possibly loss of businessEvery cost reduction proposal must be thoroughlyand microscopically examined to highlight all theramifications. Once these consequences arequantified, an assessment can be made on theirimpact post-cost reduction. The outcome must be aconscious and objective management decisionwhether to proceed or not. As a word ofencouragement, many customers will appreciate asuppliers cost reduction programme and, provided

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that they are informed, will be sympathetic and, likely,supportive. Remember, its better to have a strategicsupplier with a policy of being lean and mean thandropping service levels or even going bust!

Action Plan The final stage before the green lightis illuminated. Usually, the action plan is a straightforward understanding and (essentially) agreementon precisely what has to be done, by whom and

when plus, of course, the anticipated results. It is alsogood to have a backup plan or alternative options.With staff issues, additional complexities emerge anda sensitivity analysis is a useful tool. Strength,courage and determination are characteristics thatshould be in abundance whilst leaving emotion a littleto one side as this can jeopardise a logical andimportant decision.

Implementation Essentially, putting into effect theAction Plan. I must emphasise here that in manycases this stage requires a cool head coupled with

total conviction, unwavering tenacity and,undoubtedly, perseverance. Mutinous and rebelliouscomments will likely filter down the corridors fromunconvinced staff but determination and sheerresolve must prevail. Candid communication to staffon these actions will help to garner support and enlisttheir cooperation.

Re-assessment In cases where an alternate orcheaper product has been purchased then thefinancial results may be quickly seen. Needless tosay, the quality aspect might take longer to manifest.Where new procedures or organizations have beenadapted, the financials might take longer tomaterialise yet the service level could waver quiterapidly in the interim. Nothing should be cast inconcrete. If a cost reduction project does not reap theintended benefits then it should be modified or, in theworse case, reversed. Constant monitoring of costsand quality is a key factor which will help to avoidgradual any undoing.

Apart from the above methodology there is anotherimportant aspect of cost containment and that is thecreating of a Cost Management Philosophy

throughout the company. This is a further topicworthy of its own volumes. I cannot stress hardenough the seriousness of pursuing theestablishment of a staff culture that can generate thethoughts and ideas which will result in cost reduction.Regular lines of communication, staff empowerment,reward systems, training courses, are some of theactions that can be taken. Lets be honest, everyoneknows how to save money but there is a genuinehuman reluctance to do so in case the result ends upnegatively. Saving basic items such as electricity,

paper etc should be everyones credo. But there areways and means to achieve even more positive goals

especially if staff can see that their efforts are beingrewarded. A simple change in an operationaprocedure can save money. However, the initiatormight not be inclined to suggest such a changeunless there is suitable reward through recognitionpromotion or benefit in kind. I would always prefer tosee a form of on-going cost reduction programme

that can chip away or halt spiralling costs withpositive staff participation. However, this processtakes time and time is an element often not inabundant supply but I believe that it is one thashould be firmly incorporated into every companysculture.

Cost management is not really a complicated subjectnor is it simple. It is sometimes sensitive and oftenemotional with pressure up and down anorganisation. Generally, it is not normally part of acompanys core business. But it is increasingly being

seen as an essential element of a profitable businessworld. Being lean and mean is a buzz phrase oftenbanded about but rarely, genuinely achieved. Costreduction programmes have traditionally beenassociated with drastic cut and thrust actions, knee-

jerk decisions and wide spread staff demotivation anddemoralisation and yet it doesnt have to be like thatat all. A cost reduction programme is more likely tosucceed with the implementation of a strictmethodology and the frank interaction and dialoguebetween shareholders, management and staff that, inturn, will create the embryo of a company-wide cos

awareness philosophy. Further development alongthese lines will see a self-generating costcontainment vehicle emerging from the very soul of acompany that will, eventually, benefit all concernedparties. Win-Win-Win will always win!

If you would like to know more, please contact Charles aThe Old Rectory Capital Investment Ltd

Email: cghenshaw@gmail.com

Charles Henshaw worked for Ericsson for20 years in Saudi Arabia, Oman, Malaysiaand Hong Kong. He started as a projectmanager installing one of the first NMTsystems and ended his career withEricsson in Hong Kong managing theMobile, Fixed Line and Transmissionbusinesses. In addition, he controlled theinfrastructure support function, TrainingCentre and Quality Assurance. In 1998 he

joined Peoples Telephone in HK as CTOand later became its CEO. In 2004, hehelped Peoples to go public with an IPO and became CEO andDirector. Peoples was purchased in 2006 by China Mobile andlater renamed China Mobile Hong Kong. Charles remained aChina Mobile HK as CEO & Director until he decided to return toUK in late 2009 after 33 years working overseas and founded hisown Venture Capital Company.