Given the uncertainty in the marketplace these days, strategic cost management has come back to the forefront of executive objectives for the foreseeable future. Many organizations are sharpening their pencils and reviving the need for more transparent cost information as they fiercely compete for top line growth. Despite this trend, we still find organizations are struggling to receive all of the benefits of their cost management program and elevating their efforts to create an integrated strategic decision support system based in actionable cost data. For many organizations, the questions remains: “Are we receiving a return on the investment in cost management?”
Where Cost Management Fails an Organization
What can lead cost management programs to fail? It is our belief at Armada Consulting that cost information is only as good a the action it initiates. What we see in many cases is that organizations fail to devote adequate resources to move from information generation to strategic insight. Every month an organization’s cost management function generates cost data to report to management, but has limited time and resources to analyze and mine the information to gain insight into improvement opportunities. By the time the books are closed, the expenses are modeled, reconciled, reported and debated; it’s the end of the month and time to prepare for the next cycle of work activity. Very little time remains to properly extract the data for insights that can lead to significant impacts on a company’s bottom line.
The Cycle of Strategic Cost Management
There are three high-level phases in every reporting cycle of strategic cost management. Each phase in the reporting cycle builds on the previous one and leverages the data for varying purposes. Organizations that can progress through these stages faster and with more frequency will receive more value and benefit from their investment than those who fail to progress through the cycle. The major activities in the strategic cost management cycle are:
- Measure, Model and Monitor – Measure and model expense data to provide multidimensional cost analytics that can support operational improvements, product customer profitability analysis, and establish unit cost controls for business units.
- Analyze and Act – Commit resources to identifying efficiency improvements, excess capacity, and launch projects to improve efficiency and effectiveness based on credible cost information.
- Predict & Plan – Leverage the cost data to support volume based financial forecasts, product pricing and development, demand planning, performance incentives, product redesign, profitability measurement, and predictive analytics.
As the description implies, these cycles are iterative, improving with each iteration so your cost management program never becomes stale or obsolete. It becomes a continually evolving strategic tool that can drive significant profit improvements across the organization. However, most organizations never clear the measurement and monitoring phase and, as a result, fail to improve due to limitations in labor or technology resources, or simply due to lack of executive commitment to hold leaders accountable to pro-actively manage costs. Our view is that costs are the most controllable part of the profit equation. Organizations who commit the right resources to accelerate through the strategic cost management cycle receive the greatest returns on this investment.
Act Upon Cost Information with Confidence
Implementing a well-designed strategic cost management strategy can mean the difference between success and failure with future economic events. Having full transparency into enterprise cost drivers is no longer a luxury but now a requirement to compete effectively in today’s market. It is time for leaders to make the appropriate investment into the talent, tools and technology to move from insight to impact with more clarity and confidence.
Armada Consulting develops and designs Strategic Cost Management Systems for financial services and other business organizations. To learn more about Armada Consulting and our strategic cost management programs, call us at (918) 856-3414 or request a consultation.