Cost management: only a 'piece' of productivity gains.

"Many see cost management as 'bad,'" says Mike Baxter, a principal partner in the London office of Marakon Associates, an international strategy-consulting firm. Cost management is, indeed, seen by many as an excuse for slashing headcount and other sweeping short-term reductions. To Baxter, however, cost management is only one piece of an ongoing productivity program.

"It's about ultimately making a business more efficient over time, and achieving a level of productivity that allows the business to compete more effectively than its competitors," he says. Additionally, he comments, it's important to ensure that cost management and growth management are joined, since "getting costs out of existing businesses allows a company to reinvest that cost into new growth, while continuing to deliver profit growth."

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Effective cost management can make a good company better. London-based Cadbury Schweppes plc, one of the world's largest international beverage and confectionery companies, was performing pretty well when Todd Stitzer took over as CEO in May 2003. But it was clear to him that it needed to step up its organic growth to maintain its position and aspirations of being in the top quartile of its peers in terms of total shareholder returns. The question Stitzer raised: "How can we fund the investments that we need to make in growth in order to drive the business forward?" led to a twin focus, says Baxter--better growth and on identifying fuel for growth--which drove Cadbury to look for cost efficiencies.

When launching what was to become Cadbury's "Fuel for Growth" program, management began by setting an internal challenge. Following a reorganization that streamlined the group's structure, they set out to systematically look across the business for opportunities to take costs out of indirect overhead; several opportunities came through the group effort. Thus, a combination of that reorganization and a concerted look across the organization for costs resulted in Cadbury identifying a series of initiatives that added up to savings of approximately 15 percent of indirect costs totaling [pounds sterling]400 million (roughly $720 million USD) by the end of four years (2003-2007). The savings represents about 6 percent of Cadbury's total revenue of [pounds sterling]6.5 billion ($11.7 billion USD).

For the next step, Baxter says, Cadbury effectively "put itself on the hook for delivering," publicly announcing its ambition. "They set out internally a pretty clear path towards the 2007 target, and they are now tracking towards that." An important point that CEO Stitzer emphasized is that the cost reduction had two purposes: to make the business more efficient, and to create the funds to reinvest in growth.

Cost management programs can be effective in any company, argues Baxter, but the real prize, is "to get beyond the need to do cost reduction programs at single points in time--to managing productivity on a long-term basis." This, he notes, is really a cultural challenge that requires the company to think very carefully about how do you build a consistent culture of efficiency across all the business units--and across the center of the organization? "It's through a combination of lots and lots of little things, as well as a few big things, over time. Cultural change also requires changing the mindset of people inside the organization."

Cost management, reminds Baxter, is only one piece of an ongoing productivity program, and you have to be careful to make it just one piece. He recalls Al Dunlap, the embattled former CEO of Sunbeam Corp., who earned the moniker "Chainsaw Al" for driving cost reduction way too far. "If you focus only on costs, you're missing the point that a business is in place to deliver value to both its customers and shareholders. And, productivity, ultimately, is about enabling a business to deliver more value to its customers more profitably."