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Cost Control

Why is Cost Control Everyone’s Business?

January 15, 2014 by Dr. Jon Warner in Cost Control

Why is Cost Control Everyone’s Business?

Implementing effective cost control always should ideally start with any business (or organization if it is a non-profit) identifying what their costs are in detail (which is not always clear to all) and then carefully evaluating whether those costs are reasonable and affordable or sustainable in the longer term. Then, as the analysis suggests it to be necessary, the organization can look for ways to reduce costs through methods such as moving to a less expensive strategy or plan, scaling back, constraining variable expense items (like small-scale purchases for example) or changing service providers. A cost-reduction process might also seek to manage expenses such as phone-call costs, data service, utility bills, employee costs (including salaries) etc.

All of the above appears to be a sensible approach for any organization but any cost reduction is always painful if it is imposed from the top and/or left for too long – when the reduction targets may be very high and therefore even more painful. A much better approach is for individual leaders at all levels to take cost control seriously and to act to “reign-in” costs in a pro-active way as much as they can every day, week and month. So what is the best way to do this?

Although there are many broad ways in which costs can be controlled and/or reduced, here are 5 major ones which most leaders can seriously consider as part of their efforts:

1)  Shorten supply contracts.  In these harsher economic times most suppliers are looking for long-term stable commitments and may offer enticing incentives to sign longer-term contracts. But the flip-side of this is that it locks an enterprise in and creates commitments that may have to be met when demands for cash are greater elsewhere. It is often therefore better to pay what are often only slightly higher prices for a short-term commitment and gives the organization the flexibility it needs to renew or not when the time comes. In addition, there may be opportunities to renegotiate payment terms with many suppliers and free up critical cash flow when you need to.

2)  Ask customers for input. Customers generally like to be asked for their input on a frequent basis and this is also true when it comes to greater efficiency and effectiveness.  By discussing costs all the way along the supply chain, customers often can recommend ways to reduce expenses (directly) or save time (and thereby save money indirectly).  The added benefit of this dialogue is that talking to customers helps to deepen the relationship, shows them that the organization cares, and provides an opportunity for both parties to reduce costs and maybe improve service or quality.

3)  Work More Efficiently: Get individuals and teams together to talk about their work, projects and processes and discuss how greater efficiency and effectiveness can be achieved. Some ideas will be offered quickly and without much prompting but others may have to be encouraged. Informally, this can be done by promoting innovation and holding regular meetings devoted to creativity and brainstorming, for example. More formally, an organization may want to start a suggestion scheme and even compensate employees for their input and ideas.

4)  Eliminate unnecessary activities: Most organizations have considerable waste, duplication of effort and considerable overcapacity. The goal is therefore to identify where this exists and then act to reduce it, or, if possible, eliminate it altogether. Unnecessary or wasteful activities will vary from one enterprise to the next but will often come from areas such as too much inventory, supply cycle times which are too long, high rectification costs when quality is poor, policy and procedural bureaucracy and too much employee role overlap.

5)  Hold headcount constant (or reduce it if you have to). Although freezing the hiring replacement process is often almost the last resort for cost-cutting rather than a first one (the very last being headcount reductions of course), greater organizational efficiency is always gained when revenue per employee grows.  In other words, costs will be lower if we can get more productivity out of our existing employees and teams than by hiring new ones (which have to be trained and brought slowly up to speed before they are fully contributing anyway). Sometimes this productivity has to be brought about by better or faster working, but more often than not, it is process/task improvement, better job or role design, better technology and clearer communication that help people to give more.

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About Dr. Jon Warner

Dr. Jon Warner is a prolific author, management consultant and executive coach with over 25 years experience. He has an MBA and a PhD in Organizational Psychology. Jon can be reached at OptimalJon@gmail.com

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About the Editor and Primary Author

Jon Warner

Jon Warner is an executive coach and management consultant and in the past has been a CEO in three very different companies. Read more

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