Reduction of costs in financial institutions comes in all shapes and sizes. Delta Capita developed its future cost proofing methodology to ensure that your company is covered from every angle. To further discuss reinventing in cost-cutting, Wouter Pijl and Alex Zaiac introduce the critical upfront considerations for starting a cost reduction program.
Before initiating a drive to reduce costs in an organisation, management needs to answer four questions that fundamentally impact the process. Without these answers you may find your cost programmes quickly frustrated by internal political challenges and fail to achieve significant savings.
Incremental evolution or disrupting revolution?
The answer to this question is essential when deciding on your approach. If ambition is there but the urgency and importance of the target is moderate, then you should opt for a continuous improvement approach. This is where the main responsibility for cost saving lies with management. They are perfectly capable of reducing costs around 3% – 6% every year without significant changes to the value chain. Support may be needed from external resources to execute their plan or define the Target Operating Model, but core structures can remain untouched.
If you need an immediate change in your cost structure or you are working on a tight deadline, then you need a different approach. At this point, you need consider structure redesign, creative thinking, external reviews, and to consider radical cuts -even to the bone- of core structures. Typically to achieve this you need external process management and guidance from outside the company. This is because this perspective can provide structural and disrupting suggestions based on industry trends, helping you to stay ahead of the competition and find success despite the cuts to core functions. Such a revolution in mindset also requires strong internal political support to ensure buy-in for essential cost-reduction changes. As otherwise the project will flounder when the actual measures are ready to implement.
Cash flow optimisation or longer term improvement?
If the need is to improve overall cashflow, the approach needs to focus on measures that have a short lead time to and should refrain from measures that introduce short-term costs. The net effect of measures in the first year will likely be the predominant consideration in this cases, unlike projects that target over a longer term business case approach. This introduces a key dilemma to resolve before kicking off any solutioning: whether to focus on cash in the short term or fundamentally shape the future? Investing in cost saving digitisation for instance may not be suited to the urgency and needs of this moment if the turnaround in cost savings is a number of months, but could still offer more benefits over a longer timeline. For these reasons cash flow orientation should be carefully considered against the long-term viability and growth of the business to ensure the long-term strategic growth potential is not compromised.
Likewise, if the focus is on long-term structural changes, then the methodology should align accordingly. Investing in new technologies or redesigning one’s role in the value chain are measures to seriously consider, even though you will need to foot a bill upfront. The analysis is structured very differently than in situations than those for short-term reductions. It becomes key to understand the return on investment and utilise this to prioritise the implementation of structural upgrades.
‘All aboard’ or layoffs inevitable?
If layoffs are not what the organisation aims for, then we recommend a collaborative model with internal and external experts. External experts guard your progress towards the goal by introducing analytical skills, vision, and the outsider benchmarking perspective. Meanwhile, your internal team, with the support of management, take responsibility for targets and use their insider knowledge to select measures best fitting the actual situation with highest probability of success. Internal expertise and knowledge can easily be tapped into when people feel that the continuity of their own or their colleagues’ income is not at stake.
If layoffs are very probable, then an approach is better characterised by external consultants leading the analysis, introducing the external perspective, and using the internal staff as simply a source of information. This requires careful handling in designing cost-cutting measures as stakeholders at all levels may try to influence the direction of discussions. Were it to be driven purely by internal resources the risk would be that progress is frustrated by internal politics and biases, whilst an outside perspective can remain more impartial.
Identifying potential or reaching named target?
The last consideration for tailoring an approach for cost cutting lies in the decision whether to follow a known target or approach with an exploratory mindset.
If a target is given and communicated beforehand (i.e., -20%) it will be easier to involve the organisation in the process, because the target is completely clear. Even if internal managers oppose a certain measure, a known end target maintains the incentive and drives the search for alternative measures. This can also help provide the organisation with options to choose from. Furthermore, external consultants may help finding possible measures that account for 130% of the target needed and the internal organisation can select the measures that add up to 100%.
If a target is not set in advance, taking the approach of “let’s investigate what is possible”, then a complicating factor is introduced. A strong opposing force will exist that wants to ‘prove’ that there is not much potential for further cost reduction. This mindset limits the ability to truly innovate in terms of cost. Only proof from external references of competitors situations might influence this compromise. This is where external resources can specifically help mitigate this situation via use of benchmarking, and their professional expertise to help offset any challenges around feasibility of measures from internal stakeholders.
Cost proofing going forward
Any cost cutting project that fails to carefully weigh the questions mentioned above and the approach and expectations accordingly will struggle to meet its targets. However if one carefully selects an approach tailored to the situation, as outlined in this article, you can strongly increase the chances on reaching desired results. That is, reaching ambitious cost targets without compromising the overall health and potential of the organisation.
In our series of articles on cost reduction we will share our vision and learnings on the next steps and the different perspectives we use for future cost proofing.
This article is written by Wouter Pijl & Alex Zaiac with contributions by Rezwan Shafique, Clay Bobeldijk and Robert Voogt.