When introducing a cost-cutting strategy in your innovation agenda, you should first have a clear view of your company’s strategy and map out good and bad costs for programme intervention, at macro and micro levels. Both macro- and micro-level-oriented strategies have value and they often make more sense combined.
At a more tactical level, and in line with your strategy, you need to look at your whole organisation and differentiate between the critical ‘good costs’ and the non-essential ‘bad costs’:
- Bad costs are those not aligned with the overall growth strategy of the company;
- Good costs support the business capabilities needed to achieve the overall growth goals.
In an online article in Forbes, PWC’s strategist Rodger Howell says that ‘once a company’s costs are classified, strategic cost-cutting and improvement become a process of minimising exposure to bad costs and maximising investment in the best ones’. He adds that this practice helps to ‘create a more resilient growth model’, which is ‘particularly important during times of uncertainty’.
These bad and good costs can happen at both micro and macro level, as the figure below shows. It is key that you keep this matrix is mind when defining your strategic cost-cutting and its goals, and how to address each quadrant.
Strategic cost-cutting matrix
Overall, the bad costs are waste and an outcome of inefficiencies, which can and should be reduced. Do not underestimate them. Even micro-level bad cost-cutting, such as reducing power and resources use, can have tremendous impact on your balance account. Not only are these costs easily identifiable by your employees, but they can also be incorporated into your incremental innovation agenda in ongoing challenges, so that you are always capturing and addressing new and existing inefficiencies.
Measures to cut bad costs at a macro level (such as closing units or laying off people) may, however, have a stronger, higher and more immediate impact on your financial balance. But is it the way for your growth? We are not saying it isn’t part of it, but there are other ways you should always consider as well. These costs are better leveraged by external teams carrying out a strategic analysis to understand which costs are no longer aligned with the organisation’s strategy and can therefore be eliminated without negatively impacting core business.
On the other hand, good costs are those that support business capabilities to achieve growth goals. They may be, in consequence, worthy of more investment, so that in the mid to long term you end up saving more or increasing return.
At a more macro level, they will likely imply some investment and a more disruptive transformation, but can also have a larger financial impact. For instance, if you decide to redesign a profitable business area, you can open doors to new clients and markets and to higher returns.
At a more micro level, for example, by changing a product material or a method of doing things, you can also pave the way for an unexpected internal revolution. Here again your internal workforce can provide useful insights to redefine current products, services and processes. There is always space for improvement, and including this quest in your innovation agenda will help you structure and centralise the process, thus reducing investment in external advisory services and bringing interesting and relevant inputs for your business aligned with your needs.
There is no magic formula and no equation to tell you how and where to cut exactly.
The main message is: remember to look at the bigger picture and understand which methods are more efficient in which situation, so as to develop an effective strategic cost-cutting and improvement strategy.
This process of employee engagement and empowerment will also make your organisation more future-fit and will create a cost-conscious culture, essential to creating a sustainable cost-cutting and improvement strategy.
Andreia Agostinho Dias, Sales Executive
Diana Neves de Carvalho, Exago’s CEO
You can access the full paper here