Cost management within business and financial service organizations has long been thought to be the domain of accounting and financial departments. What this approach is missing is transparency throughout the whole organization. To achieve real economic profitability your organization and business needs to look at strategic cost management.
The first step in strategic cost management is to align Operations, Strategy, Risk Management and Finance to instill a transparency and bring cost management from a back-end perspective to a front-end decision support function. This is not to suggest management by numbers but rather to encourage a culture of accountability based on economic profitability rather accounting profitability.
Why Strategic Cost Management?
Implementing cost management programs without the strategic component essentially amounts to a management by numbers strategy. Many organizations and businesses are finding out that when the old strategy is applied they are ill equipped to sustain profitability because they have lost customers, suppliers, key people and have fallen behind in technology.
A properly designed and implemented strategic cost management program will be sustainable no matter which direction the economy turns. The alignment of operations, strategy, risk management, and finance along with the culture of cost management lends itself to be flexible and accurate when making the decisions to cut back, expand, increase production or to acquire new IT resources. Using strategic cost management will prevent the loss of key people, customers, suppliers and other resources because it will ensure that when cost management actions are enacted these actions are not being done for the bottom line only, but are focused on corporate strategy and will promote economic profitability.
Cost Reduction With Strategic Cost Management
As the name implies strategic cost management does in fact involve cost reduction, however when it is looked at closely it really is different. The methods are more focused on maintaining value and economic profitability rather than just reducing costs. An example of strategic cost management might look like:
- Determining your Value and Cost Drivers – Viewing your costs and their associated contribution to a value, organizations and businesses can determine which costs have the highest value-add, and which ones are unnecessary.
- Strategic Cost Efficiency & Cost Analysis – These are the keys to finding processes that can be streamlined to reduce cost and finding other areas of cost inefficiency, which may be improved.
- Strategic Cost Management– Cost Reduction
- Preserve and maintain key value drivers and optimize their long-term value – Marketing and advertising, upgraded training and recruitment are a few areas that can be overly scrutinized in an economic downturn. In taking the strategic view you should consider how lessened market visibility, missing key people and suppliers will impact your organization in the future.
- Review and reduce costs – re-engineer, remove or reduce business processes or activities that do not contribute to cash flow, business opportunities, or increase sales.
The focus of strategic cost management is to give the organization the ability to think outside the box when looking at cost control. By doing this your cost control measures will be aligned with your business’ strategic goals and improve your economic profitability.
Armada Consulting leads the way in Strategic Cost Management and provides consulting services for financial organizations, banking, IT Cost Management and Telecom industries. To learn more about Strategic Cost Management and how it can improve your organization’s economic profitability call Armada at (918) 856-3414 or contact us via email.