Thursday, 18 April 2013

Addressing Four Barriers to Effective Cost Reduction

Authored by John Shaw

Deloitte’s latest survey of Fortune 1000 companies highlights a shift in procurement strategy that is becoming increasing popular with our clients: Save to grow. The survey responses represent a major step forward for procurement. They demonstrate that major companies are continuing to focus on cost reduction as top strategy even as they shift back into a period of revenue growth. Furthermore, they see this savings as a catalyst for driving the future growth.

Mickey North Rizza writes about shift often…

What I found particularly interesting in this survey was that despite this increasing focus on costs, 48% of cost reduction initiatives did not meet their goals. Organizations are putting more internal resources into these project but they are not yielding the results that they need.

These are the top 4 barriers for cost reduction success and some thoughts on each:

  • A lack of user understanding (74 percent). Communications are obviously an important part of running any successful project, however it is very easy for teams to shift to communicating what needs to be done, versus why it needs to be done. It is the ‘why’ that drives real understanding. Create communications in a mindset of ‘Bottom Line Up Front’ (BLUF) is a great way to help develop that understanding.
  • Erosion of savings (73 percent). Savings initiatives require ongoing reinforcement to stick. Whether it is a new contract or anew sourcing tool, the potential savings offered erode quickly if the contract or tool is not adopted. By measuring the progress of the changes, rewarding success and removing barriers the procurement team can follow through on the potential savings by decreasing the erosion it experiences on its path to realized savings. 
  • A weak business case (62 percent). A poorly conceived project that does not align to company goals is simply not a good project. In my experience though, many projects that are perceived as having a weak business case actually have a powerful one that is not fully understood or communicated beyond the original decision makers. This ties back to BLUF and getting that understanding out to the stakeholders. 
  • Poor design and tracking (58 percent). The report does not go into a lot of detail behind this reason, I take it to imply that programs are not set up correctly and lack tracking and follow-through. Stakeholder engagement in program design can help to improve the ultimate design of an initiative, especially if the stakeholder team can agree upon the KPIs that will be used to track its progress.
Are you facing similar challenges? What is/isn’t working for you?


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