Cost management: Not all savings are created equal

Good cost management is not just about reducing costs. It is equally about understanding the impact on the business. By considering the time horizon, quality and strategic implications, companies can create a stronger and more sustainable cost base.

In this article, you can gain insight into how to approach strategic cost management in practice.

Where can we cut costs? How quickly can we do it? What will the impact be?

In most cases, these measures are a way of compensating for something else. When management puts all IT purchasing on hold or postpones hiring until next year, it is an easy way to achieve a quick effect and protect EBITDA. But the underlying reason may simply be that sales are below budget or that too much money has been spent in entirely different parts of the business.

Good cost management is therefore not just about reducing costs through last-minute initiatives. Anyone can do that. It is much more about understanding which costs we are reducing, what impact this will have on the business and how quickly the effect can be realised. This is the only way to achieve genuine control and impact.

It may sound paradoxical, but saving DKK 10 million is not necessarily better than saving DKK 5 million if the larger saving also reduces quality, weakens the product or removes capabilities that the company will need in the future.

It can therefore be useful to divide cost-saving initiatives into three overall categories:

The obvious, the long-term and the transformational.

The natural place to start is with savings that have no, or only a very limited, impact on customers, products, quality or the organisation’s ability to deliver.

They exist in virtually every organisation, particularly in companies that have experienced periods of high growth.

Organisations have a tendency to become somewhat bloated. New systems are purchased without decommissioning the old ones. Licences are added but rarely removed. Supplier agreements are automatically renewed. Processes acquire additional steps. Reports continue to be produced even though no one uses them anymore. And activities that once made sense continue long after the need for them has disappeared.

The obvious savings are therefore often less about major strategic decisions and more about discipline and transparency.

Each individual expense does not have to be substantial. But the total amount can be.

The next category is more complex.

It includes initiatives that can have a significant financial impact, but where the benefits take longer to realise.

Examples include automation, process optimisation, the consolidation of administrative functions, system consolidation, revised procurement models or better workforce planning.

What these initiatives have in common is that their impact may not be visible in next month’s results.

In return, they can create a more efficient and scalable cost base over time.

What is interesting about long-term initiatives is that they do not necessarily require a fundamental compromise on the company’s product or quality. On the contrary, in some cases they can both reduce costs and create a better organisation.

However, they require investment, management focus and patience, which is why they are also easy to postpone.

Long-term initiatives are therefore not simply about saving money. They are about creating a better and more efficient cost base.

The final category is fundamentally different.

Transformational initiatives are no longer solely about efficiency improvements. They change the business itself and are driven by a need to achieve a significant impact quickly.

They may involve closing down products or markets, reducing service levels, making major organisational changes or fundamentally changing the way the company operates and delivers.

The financial impact can be both significant and relatively quick.

Transformational cost management therefore requires more than a spreadsheet calculating the savings. It requires strategic choices and clear leadership.

When you close down a market, reduce a product area or fundamentally change the organisation, you are not merely reducing costs. You are creating an entirely different reality for the organisation.

Is that all it takes? Three categories and then you achieve an impact? No, of course it is not that simple.

Cost management is a difficult discipline in its own right, and the three categories are merely one part of the method. In addition, we often see that cost management is only brought into play when it becomes absolutely necessary. But this also means that, in order to achieve the necessary impact, you may be forced to hit the organisation harder than could have been prevented through timely action. And no one wants that.

Good cost management therefore requires planning the process. It requires clear and continuous communication. An overview and regular reporting. Stakeholder management. The right tools and the right capabilities. Everything that characterises effective processes with a lasting impact. Quite simply because it is prudent to plan your cost management while it is still unnecessary to do so.

We would be very happy to discuss this in more detail — preferably before the situation becomes critical.