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Cost cutting - a management addiction; upper management lacks a cost cutting strategy: jeopardizes business development and growth.

Upper Management Lacks a Cost Cutting Strategy: Jeopardizes Business Development and Growth

Top management puts too great a focus on cutting costs, which sacrifices business development and growth. This was revealed in a recently released study of 338 executives' cost-cutting experiences by Princeton-based international consultants, Kepner-Tregoe.

Those who undertake a cost-cutting initiative are four times as likely to reduce costs again, yet still don't rate their attempts as successful. Kepner-Tregoe president Quinn Spitzer explains," Companies leaving major operating systems unchanged allows for |creepback' in costs. Unless executives understand the principles behind cost management they will continue to struggle with problems that won't end with the recession - recurring costs and demoralized workers."

Cost Cutting Neglects

Business Growth

"Typical cost cutting focuses on head-chopping can blind executives to the strategic growth opportunities essential for future survival," says Spitzer.

The current approach to cost cutting is often undertaken at the expense of the organization's strengths in customer service, R & D, technology and production capability, the study shows. The objectives behind cost cutting differ: 47% of those interviewed undertook cost cutting solely to reduce costs, 27% sought to improve profitability, and 14% attempted to improve quality, while only 11% were responding to changing customer or market needs.

Effects of Cost Cutting on

Quality/Productivity

Executives responding to the survey believe that their initiatives have had a minimal impact on their organization's quality and internal systems. Only half of the executives note improved quality as a result of their cost-cutting efforts, the other half finding a negative/neutral effect.

The short-sightedness of focussing solely on costs is confirmed by the executives who have not downsized. When they were asked what distinguished their company from their competitors who are cutting costs, the number one response was |growth'; number two: |focused strategy'. "This highlights the importance of using a more strategic framework for business planning," notes Spitzer. "Few cite efforts to stimulate revenue as a way of catapulting their organizations into profitability and growth. Only one in ten executives in our survey say by cutting costs they are responding to changing markets or customer expectations - a one-dimensional focus."

Loss of Employee Morale is

Greatest Fear of Executives

Executives mentioned a decline in employee morale (38%) as their paramount fear nearly twice as often as their second lingering fear: loss of key people (21%). Compromise of quality/effectiveness ranked third, with 18% of the executives citing it as a concern.

However the potential for a negative effect on employee morale did not lead the executives to rethink their behaviour: When asked what they would do differently next time, few cited actions that might reduce the negative impact on morale: 17% responded they would endeavour to have better communication, 9% would increase employee involvement, and 3% would offer better training.

Cost Cutting as a Global

Issue

Executives around the world report that their organizations are undertaking cost cutting initiatives in numbers similar to their American counterparts: 87% of U.S. organizations had undertaken a cost cutting initiative within the last five years, compared with 86% abroad.

The cost-cutting trend has progressed upward at a relentless pace in Canada, Great Britain and Germany with the largest surge across the board occurring since 1990. Notably Japan - long perceived as invulnerable to the recessionary pressures that plague its competitors - has witnessed a dramatic increase in the last two years.

Mr. Spitzer concludes, "Executives worldwide need to ask if controlling costs through short-term head chopping is the only way to manage in a more competitive environment."

The Seven Principles of Cost Management

1) Know Your True Cost

The most critical element in knowing your cost is adjusting standard costs for volume in all aspects of your business: products and services, markets and customers, suppliers, parts manufactured in-house and inventoried items.

2) Continuously Improve Costs

This makes cost management standard operating procedure. Once true costs are known, employees can constantly identify opportunities for eliminating, reducing or better managing low-value work.

3) Provide the Tools to Manage Costs

Employees are given decision-making, team-building, problem-solving and other thinking skills aimed at controlling costs, improving quality and productivity, and enhancing performance.

4) Involve Employees in Decision Making

Well-planned involvement of employees can be used to solicit input on potential cost management areas and can forge commitment to cost management initiatives. When employees understand the organization's objectives and have accurate cost information, they will excel at cost management.

5) Reduce Complexity - "The Rule of 50/5"

Reducing complexity means constantly questioning why work is done, and, if it is important work, how it can be done more efficiently. "The Rule of 50/5" - verified by work with numerous clients - says that 50% of a business' activities produce less than 5% of the organization's value added.

6) Change the Performance System

In an organization that practices cost management employees must know that they are responsible for managing costs, have the skills to do so, receive positive reinforcement for cost management and get timely feedback on the results.

7) Use Your Strategy

In tough times, there is a temptation to rush to cut costs without thinking carefully about the long-term future of the organization. Cost management uses the organization's strategy as the initial screen for decisions on costs. The first question cost management asks is: "What does our strategy say about making the tough choices on products, markets and resources?"
COPYRIGHT 1993 Canadian Institute of Management
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Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Title Annotation:includes related article
Author:Keener, Bruce
Publication:Canadian Manager
Date:Sep 22, 1993
Words:890
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