The 3 “E’s” to Strategic Cost Management

There are 3 “E’s” to strategic cost management:

Expense
Management – usually the first and easiest lever to pull when quick adjustments need to happen.

Efficiency – This requires a deeper understanding on operational process costs beyond the income statement. Lean six sigma and other process improvement skills come into play.

effectiveness – These are some of the most difficult decisions to make. these decisions require understanding markets, products or customer segments where you aren’t meeting profit objective and the realizable financial impact of exiting those segments of your business. Like it or not, every business has segments of its business that are unprofitable, the trick is understanding if I exit this segment will the immediate impact of the reduction in variable and semi-variable costs be greater than the revenue given up. Often times companies make these decisions based on poor cost models and come to realize that the decisions simply ended up in passing fixed and overhead costs to other segments of the business, burdening there profitability.

Why Strategic Cost Management? Why now?

Most would define a large part of business prosperity as the profitable growth which ultimately creates shareholder value. Shareholder value drives the value of an enterprise in private firms and market capitalization in public firms. We have previously discussed our view of the challenging economic climate across many industries for the foreseeable future. The question for most industries is, “how do you drive profitability against a backdrop of challenging top line growth?”

The old adage that you cannot cost-cut your way to prosperity still rings true. However, we would argue that through strategic cost management, you can more effectively measure and direct expenses to drive prosperity. We believe a key first step is using strategic cost management to better understand the drivers of profitability in your business.

Improved cost information can help enable more effective tactical and strategic analysis. Tactical analysis creates a dialogue to drive operational efficiencies that can improve profitability, make business processes more efficient and improve your ability to meet the needs of your customers. Strategic analysis creates a dialogue to insure financial and human capital is better aligned to provide an optimal return.

We believe only by creating more effective fact-based decision making can you create the appropriate dialogue to drive profitability in a challenging macro environment. Armada Consulting has a vast amount of experience in helping create the right tactical and strategic dialogue in your organization. Does your organization have the opportunity to benefit from this dialogue?