In Business
Cost Optimisation: To Achieve Sustainable Cost Improvements, Focus on Enhancing Business Effectiveness
By Declan Keane, Head of Business Performance & IT Advisory, KPMG
Jun 21, 2010 - 9:09:47 AM

During a downturn, companies are naturally looking to maintain their bottom lines by identifying costs that they can take out of the business. Today, it is  hard to name a company that has not pointed to cost reduction as a key priority for the coming year.

Yet, a recent KPMG survey has found that 9 out of 10 cost-reduction programmes fail to achieve their target and do not deliver long-lasting results. Why? Instead of focusing on long-term improvement, companies look at cost reduction as a short-term exercise to bolster earnings. When times are good, it is on the back burner and, when times are bad, the focus is on a short-term fix.

However, there are some signs that this is changing. Leading organisations are beginning to realise that “cost optimisation” -- rather than cost cutting -- is not a one-time exercise and are focusing on more effectively managing their business to deliver sustainable cost improvement. They take a holistic view across functions and processes to identify waste and potential areas of improvement while, at the same time, gaining visibility into what drives cost.

Ultimately, effectively managing the business is at the heart of successful cost optimisation strategies and can bring increased efficiency, improved costs, enhanced quality and service levels and reduced risk. Executives must identify and understand the drivers of cost to make intelligent and sustainable changes yet few take a holistic view.

Innovative Cost Optimisation Strategies

Because each organisation has its own distinctive set of business issues, there are no “one-size-fits-all” solutions. However,  there are some often-overlooked areas that can frequently offer good opportunities for cost improvement. The following back-to-basics approaches are good starting places to yield cost improvement and enhance business effectiveness. Some of the strategies are not new, but rather take historical strategies to the next level.

Assess opportunities to improve working capital and increase cash flow.By focusing only on expenses and net income, many organisations forget the potential impact that improved working capital and enhanced cash flow can have on the business. Typically considered the responsibility of the treasury department, total cash management requires a focused effort across all aspects of the business including marketing, sales, operations, logistics and finance.

Ultimately, companies need a “cash culture” that not only focuses on profit and loss, but also critical balance-sheet concerns such as liquidity, receivables and inventory.  Regular cash monitoring and accurate forecasting of cash and working capital levels can help give management a clearer view of the company’s current position and will also help identify potential opportunities and risks that could arise.

Restructuring the supply chain to reduce tax costs.

In a global marketplace that becomes more complex daily, managing the flow of materials and goods is not an easy task. While executives look at how to integrate their supply chains with suppliers and customers, reduce their inventory costs or add flexibility to their delivery schedules, rarely does the question of “how to reduce the tax bill” come to mind. However, reducing the tax burden represents a significant opportunity when it comes to structuring and managing the supply chain.
 
Tax efficiencies can be realised through the realignment of functions, assets and risks within core supply chain and operations processes. By redesigning supply chain processes, companies can potentially achieve significant savings impacting international, VAT, customs duties, property and corporate income tax.

Green is lean.

Organisations are increasingly focusing on environmental and sustainability programmes. A recent KPMG International survey of 590 global supply chain and C-level executives found that one-third are beginning to, or are in the process of, reducing the environmental impact of products they are producing. Almost another third (31 percent) are considering doing so.

While these initiatives’ main benefits are perceived to be in the “good corporate citizen” arena, companies are finding that “green” programmes are yielding real cost savings. This includes supply chain improvements that require less materials and energy to produce and ship products; effective use of energy, particularly around data centers and IT management; recycling benefits; and operations improvements that reduce the carbon footprint and enhance efficiencies.

Evaluating alternative business models to optimise cost structures.

Many companies are not realising the full value of their shared service arrangements . There are clearly big differences between “world-class” shared service operations and “average” ones.

So what are leading organisations doing differently? For one thing, they are recognising that consolidating functions into shared services can promote standardisation and consolidation, but not necessarily optimisation, across processes and tasks. To get to the next level of savings that are truly sustainable, organisations are taking an end-to-end process view, redesigning processes within the service centre, ensuring connectivity with core business processes and continually evolving their model. Process optimisation is the objective, with sustainable cost savings as the result.

Designing management information systems to provide visibility into the drivers of costs.

Projects do not reduce costs, people do.  To manage and reduce costs on a sustainable basis, people need relevant and timely information around what drives costs.

Leading organisations are revisiting their management information systems with a focus on what drives costs at the process level. Process and activity costing techniques are being utilised across businesses and functions to identify areas of complexity and improve process effectiveness over time, by reducing duplicative and non-value-added activity.

The Role of Finance in Cost Optimisation and Business Effectiveness
Successful and sustainable cost optimisation initiatives must be a cross-functional exercise. When business decisions are made in silos, their impact is typically muted -- or worse -- in conflict with other groups. Since the responsibility for making cost improvements does not lie with one department or executive, embedding cost discipline within the corporate culture is essential.

Finance also plays a critical role in establishing, monitoring, and supporting cost optimisation strategies. Leading companies are integrating the “discipline of finance” within operational strategies to drive long-term business effectiveness and achieve sustainable cost improvements.

Looking at costs across processes and connecting processes is key to making smart, sustainable improvements. Ultimately, it means rethinking the entire business model around lower costs, possibly taking out whole layers of the organisation or supply chain. The focus should be on creating a leaner, more efficient organisation, with cost reduction as the consequence, not necessarily the target.

For further information, please contact:

Declan Keane
Head of Business Performance & IT Advisory
Tel +353 1 410 1335
Fax +353 1 412 1335
e-Mail declan.keane@kpmg.ie

http://www.kpmg.ie/Succeeding/article8.htm