When
a Step Change Is Needed
Companies
may need to address their cost structure suddenly for one of many reasons, such
as reacting to dramatic changes in the marketplace, correcting a large drop in
profitability, or enabling a new strategy. Companies in such straits can still
operate from a position of strength, by following these principles in a
cost-transformation program:
• Look for early quick wins. Rapid cuts in nonessential costs help motivate people and
provide cash to fund the initiative. If you reinvest those funds in more
productive directions, these early wins also demonstrate that you are serious.
• Start with the end in mind. You are cutting costs not just to survive, but to focus
your future efforts. Start by determining your value proposition and the
capabilities you need.
• Tackle the root causes of high
costs. Think freshly about the business;
look for dramatic step-change shifts that can free up capital.
• Establish stretch targets. Target an aggressive but credible figure, representing
enough funds to reinvest in growth and build a cushion for savings erosion.
Such stretch targets stimulate new ideas and help high-potential managers reach
beyond comfortable limits.
• Hold managers accountable for
specific targets. Otherwise, savings tend to evaporate.
• Make a public commitment to the
program and explain the “fit for growth” philosophy to your shareholders.
Commitment reinforces the strategic importance of the program and protects your
ability to reinvest some of the savings in your most important capabilities.
• Explicitly describe how you expect
to identify and implement cost savings.
The top team should deliver this message, convey a sense of urgency, and set an
example by cutting back costs associated with their own day-to-day practices.
• Design a single cohesive process,
not a collection of separate expense-reduction projects. Put a single steering committee in charge, overseeing
cross-functional teams that suggest specific measures. Schedule frequent
reviews to assess progress and make decisions.
• Assign good people to carry it
out. Staff the cross-functional teams
with up-and-comers; give them the information and authority they need.
• Take on sacred cows. Some nonstrategic capabilities have entrenched supporters.
Encourage people to bring these controversial opportunities and thorny issues
to light, and give them ways to do so without becoming vulnerable.
• Track progress in a standardized
way, tied to the bottom line.
Report results on an ongoing basis.
• Stick to your purpose. Some managers will say, “Give me my cost reduction number,
and let me take care of it.” This is not that kind of effort. Its purpose is to
redefine the work and to position the company for enhanced growth, using a
shared understanding of the value and differentiation provided by each activity
and capability. If you keep your eye on that goal, others will follow.
by Deniz Caglar, Jaya Pandrangi, and
Ashok Divakaran 
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