When the Dilemma Strikes
Being a business consultant is a fascinating job. It certainly exposes you to a broad range of interesting opportunities to help solve client challenges. In addition, you get to see how people think and how they tackle business challenges. Not too long ago, I spoke to a manager of a small team of technical writers. She faced a common dilemma: A company-wide initiative mandated cost savings of 10% across all functional areas. Although cost savings initiatives are routine for many organizations, quantifying and qualifying savings is a different story.
For this manager and her team, the situation was tricky. Mainly because the team already operated on a shoestring budget and had to do more with less. At the same time, their work was crucial for timely product releases and global sales. In other words, the team’s contributions were always on the critical path.
Moreover, upcoming new product releases added pressure to their efforts to successfully support the company’s growth. If anything, she would need to add staff. Unfortunately, her situation was not uncommon for many technical publications departments.
Still her dilemma remained: What options did she have to achieve the mandated 10% savings without undermining the team’s contributions?
Understanding Cost Savings
Reference Points and Reference Timeframe
Controlling cost usually involves a combination of different measures that together help achieve a desired cost improvement. The actual net change is the result of comparing the previous cost point with the new cost point.
- Net Change (money) = New Cost Point – Previous Cost Point
- Net Change (%) = (New Cost Point – Previous Cost Point) / Previous Cost Point
If the initial cost point is higher than the target cost point, then the calculated net change is negative. In other words, a negative change highlights a reduction in cost. However, to make this a valid comparison, we need to make certain that we consider the same cost items.
In addition, tracking costs requires a reference timeframe. For example, we could use the company’s fiscal year or another appropriate timeframe. This would ensure that we assess incurred costs over the same start and end points for different periods.
As a general comment, the calculated net change is a relative measure. The reason is that we compare one reference point against another reference point. Therefore, depending on the reference points and timeframe we choose, we will get different results.
Also, we have the option to express the net change as a monetary or percentage value. A monetary value could make sense if we want to achieve a specific cost savings amount. Often, though, cost savings initiatives use percentages for their goal setting to keep things simple. The specific approach depends on the scope of the initiative and the company’s overall strategy for managing its supply chain.
Putting Cost Savings into Context
Winston Churchill supposedly once said that the only statistics you can trust are those you falsified yourself. All jokes aside, one of the big issues with cost savings initiatives is that goal setting requires context. If we say that we want to save 10%, we also need to specify what the 10% refers to.
The important thing is that we don’t undermine the right activities and contributions by simply cutting costs. For example, if last year’s budget was $100,000 then reducing it by 10% would be the wrong approach. It would be especially fateful if cost cutting is at the cost of operational ability to support company activities.
Usually, budgets can change up or down from year to year because they support projected growth and company activities. Thus, using a department’s budget as context for setting our cost savings goal could be counterproductive.
Essentially, putting cost savings goals into context should involve assessing fixed and variable costs. To recognize these, we can start by mapping the supply and value chains for our functional area. This would provide a meaningful context and allow us to identify the right cost savings opportunities.
Typically, a supply chain captures a company’s internal perspective on how it supplies, manufactures, and distributes products and services. In contrast, a value chain reveals whether company activities generate the right product or service value from a customer’s perspective.
Cost Control Measures
Cost control measures are approaches that we can take to change an existing cost point. Moreover, understanding the different types of measures helps identify the specific cost savings opportunities. Following are three common measures with examples. These are not all-inclusive but provide a general idea of cost control measures that we could use.
- Reducing unit cost
- Reducing number of produced/used units
- Eliminating cost items (equipment, services, staff, overhead, etc.)
- Discounts (volume discounts, promotions, loyalty programs, etc.)
- Waived fees (minimum fees, rush fees, surcharges, etc.)
- Optimizing processes (greater automation, better tools, reduced rework, better information management, documented process activities, greater productivity, etc.)
Both cost reduction and cost elimination often involve hard cost savings because they directly impact the bottom line. In contrast, cost avoidance consists of soft savings. Soft savings represent intangible, potential savings that may or may not occur.
Likewise, soft savings are normally deferred and require a more complex analysis to quantify them. For example, gains such as greater productivity and efficiency can be a challenge to quantify. Therefore, companies sometimes classify soft savings as benefits rather than actual cost savings. Nevertheless, soft savings represent a valid category of opportunities to impact the net gain if done properly.
Solving the Dilemma
Let’s return to our business case. After some discussion and analysis, the manager and her team were able to identify several cost savings opportunities. Overall, they determined that translations, labor cost, and content management offered the greatest savings potential.
Also, they concluded that investing in staff training, authoring tools, and so on would be worthwhile in the foreseeable future. However, given the initiative’s limited timeline of just 6 months, they had to focus on opportunities with immediate impact. Following is a snapshot of the cost control measures the team took, which included hard and soft savings.
- Renegotiated translation pricing
(reduced per-word rates for high-volume language pairs, reduced hourly translation rates, reduced project management fee)
- Eliminated printed product documentation (switch to digital product documentation only)
- Renegotiated terms and conditions for translation services
(volume discounts, extended contract/loyalty program, no rush fees for projects that take three or more business days, extended payment terms)
- Consolidation of language service providers to improve purchasing power
- Optimized batching of small translation projects to avoid minimum fees
- Use of contract writers on an as-needed basis to accommodate projected demand and peak workloads (no addition of direct/full-time employees)
- Restructured selected product documentation to improve standardization and modularity of content (increased reuse, decreased content variance across products)
- Agreed with program management to hold off translation into new languages for selected documentation until regional sales order threshold is met
- Reduction of business travel expenses (avoid non-critical business travel, use cheaper lodging)
All in all, the timeline was very short to implement additional improvements and enable further cost savings. Nevertheless, the manager was able to demonstrate that these measures would achieve at least 7% in hard savings. Moreover, her team was confident the measures would generate an additional 3%-4% in soft savings during the 6-month period.
Although cost savings initiatives are common to all businesses, defining cost savings and identifying opportunities can be a challenge. Because different functional areas play a different part in a company’s supply chain, their opportunities for cost savings differ as well.
More importantly, the goal setting for any cost savings initiative must make sense. In other words, regardless of the monetary or percentage value we choose, goal setting must have context. And this context can be unique for each functional area or department. Consequently, 10% is not necessarily the same 10% for each functional area. Likewise, goal setting requires reference cost points and a relatable timeframe to enable the comparison of old and new costs.
Furthermore, understanding and using cost control measures allow us to better identify opportunities for cost savings. However, functional areas that provide a service and don’t process or produce physical goods tend to rely more on soft savings. This can make it impossible to achieve cost savings goals through hard savings alone.
Therefore, companies need to recognize that cost savings initiatives and goal setting should be flexible. Only then can such initiatives set realistic expectations for all functional areas and increase the chances for true success.