Cost Reduction – Are you missing a trick?

Posted on October 17th, 2014 by

Photograph of a piggy bank

You often hear people in business say they prefer pictures to words, something along the lines of “Give me a diagram any day, I can’t be doing with reading loads of text.”

I have a confession however: there are times when I’d rather hear the words (not necessarily a thousand) than work out what some visual is supposed to be showing or telling me.

Having said, not drawn, that though: one of my favourite visual aids is a small but impressive “dashboard” tool that allows you to look at the impact of cost-savings (the Bottom Line) relative to growing the Top Line (turnover/revenue) of your business.

We call it the Equivalent Impact Calculator, but don’t let that put you off. It’s a tool that helps you to picture how much you would need to grow that top line to achieve the same financial return as you would by saving, say, 10% on all external spending (bottom line). It also compels us to consider which is actually easier.

For some companies, dramatic – or, indeed simply steady – growth may well constitute “business as usual” and so feel relatively comfortable, a “path of less resistance” compared to a rigorous inquiry into third party expenditure. The latter is often viewed as a minefield, fraught with contractual limitations, bedevilled by lack of data and insight, or dauntingly complicated by a widely dispersed supply chain.

Setting aside those scary words, though: a quick health-check using the dashboard invariably gives an immediate, graphic and very telling insight. By stating your cost reduction target and adjusting other variables to your situation, you get a very compelling picture right away: an instant portrait of the amount by which you would actually need to grow the business to enjoy the same contribution to your profits as you would through proper attention to cost.

Cost Reduction vs Revenue Generation

The consistent message: it’s much easier to “make” money through effective spending control than it is by going out to get it.

This apparent paradox of sales versus cost control is actually simple to explain: more effort is required to generate revenue than to realise an equivalent saving – provided your cost control strategy is intelligent and focused.

And yet “Cost Reduction” remains something of a dirty word (or two). Maybe that’s because it sounds parsimonious, uncreative; it suggests you’re in trouble. People would rather be doing glamorous, dynamic stuff to make money rather than save it, perhaps. Indeed, the response to the very idea that money could more effectively be saved rather than coined sometimes borders on “How dare you!”

It’s also understandable that already successful organisations, achieving healthy margins, don’t have cost-consciousness as high on the radar as, for example, sales. Either way, there’s a problem with the terminology of Cost Reduction; which is a shame. Especially when you consider how deeply the idea of minimising excess is ingrained in quality improvement initiatives from Kaizen to TQM, ISO and the rest.

For example, the Japanese term “muda” – waste – is an integral part of the “quality way” of firms such as Toyota and Unipart to this day: cost awareness and continuous improvement going hand in hand.

Save or spend in cost reduction

From personal experience, when I ran campaigns in companies looking to give more ownership of quality to each individual, we always started with a “QED” challenge – in this instance, save a Quid Each Day, that is, something doable for everyone. This always set the scene for the next phase: Quality Each Day, which we would nowadays express as Adding Value and still couch in ideas such as getting things right first time, on time and every time for your Internal Customer as well as the External.

We should consider changing the language of ‘cost reduction’ and telling a truer story – that quality is enhanced and margins increased when companies look at better ways to spend less. It’s a genuine cake-and-eat-it scenario. And the people charged with doing the spending – Procurement – can actually contribute more to the bottom line than their counterparts out in the field who are winning customers.

Focus on ‘Saving’ rather than ‘Getting’

Don’t file supply chain under ‘Frugality’ then: put it where it belongs, in ‘Quality and Increased Business’. Maybe talk about ‘Quality of Spend’, or ‘Margin Maximisation’? Any more suggestions…?

The Equivalent Impact on Turnover Calculator certainly supports the argument. It also got me thinking – and not just about the trick that some organisations appear to be missing. I don’t think it’s too outrageous to suggest that this tendency to focus on ‘Getting’ rather than ‘Saving’ runs through modern society at a fundamental level.

If you’ll allow me to say it in fewer words but with a few more syllables (and a little alliteration): we tend to have a preference for profligacy and procrastination rather than prudence. It has become ingrained in our collective nature to think less of “less”. From global warming to obesity, we don’t appear to “do” reduction and conservation until we’re compelled to.

That’s when the sharper associations of ‘cut’ really come into play: leave it too late – and it hurts. Do I have to mention the recession? Recent economic necessity has demonstrated on the global scale that when we ignore the real Gain to be had from cost-control… we get the real Pain.

When times get tough, it can be too late for everyone – individuals and companies alike – to realise how beneficial cost-consciousness could have been when the focus was more on winning than saving. It’s much better to get ahead of the curve and stay there: but it can require imagination.

Finally, I confess again: the best medium for this message is graphic. It’s what our Equivalent Impact visualizer shows every time – less really is more. In fact, it’s more than you think. Let me show you a picture…

Image of Equivalent Impact Calculator

This is at the heart of what we do at SpringTide: helping our clients manage spend in the billions whilst reaping the full benefits of such activity, in quality and on the bottom line. We have a range of tools, intellectual property and hands-on experience we deploy to save people money every day; and are proud to help them realise the choice to invest it elsewhere – whether you want to be able to reduce your prices, gain market share, increase profits, delight your shareholders, free up funding to spend elsewhere…

We’re confident we can make it worth taking a look: there’s a lot to save – and so much more to gain.

If you’re thinking about expenditure and would like to have a look at our calculator for yourself, call us on +44 (0) 1543 466835 or email [email protected]

What do you think about the quest for revenue vs managing costs? Do you have a better suggestion for a new way of saying “cost reduction”. Let me know in the comments below.