Search

Get going with cost management

By Peter Spence, Associate Technical Director — Management Accounting, Association of International Certified Professional Accountants

I have previously talked about Cost management – from the CFO’s problem to everybody’s responsibility, and introduced a checklist of five steps you need to take your organisation through to continuously improve its cost-competitiveness. Let’s look into how to get a cost management change initiative going in your business.

But first, what do I mean when I refer to cost-competitiveness?  It’s about defining how organisations can achieve sustainable profit optimisation including cost, quality, customer relevance and price. 

Global competition is here to stay and more than ever before, the price you now charge is the price your customers are prepared to pay. Price has become decoupled from cost. Permanently.  Cost + Margin ≠ Sales.  Sales – Margin = Cost. You know what you can sell it for, you know what margin you need, therefore, you know what cost it cannot exceed.  It’s a different mindset. For some business models this is an opportunity and a source of competitive advantage. For others it’s a threat. Aldi and Lidl entered the crowded UK supermarket space and have succeeded with this mindset.  Incumbents are struggling to adjust.  That’s why for this blog I’ve decided to stick to cost management. Now that I have my caveat out of the way I will touch on some practical matters to help you make cost management a success in your business.

What’s the opportunity for cost management in your business? Is it to identify unprofitable customers, products or services? To improve process efficiency? To manage costs better across the business?  

Here are the rules of the game:

Make the case for change
Wherever you decide to start, you’ll probably need a compelling and robust business case to gain the unequivocal backing of colleagues. If you’re a CFO and think you can manage costs in your business solo, you may need to read this blog.

Get dedicated expert help
Even if you have the right expertise in your team, your employees are probably busy trying to keep the wheels from coming off the bus. Having dedicated expertise to shoulder much of the burden could prove invaluable. Also, often you don’t know what you don’t know; so opening up to new skills can introduce fresh perspectives – and get them to test your business case assumptions early in any engagement.

Caution! Do your business case before you get the experts in to ensure it fits the needs of your business rather than the needs of your experts.

Keep it simple
You’ve heard of the KISS (Keep It Simple Stupid) principle. Now apply it. If costing models become unwieldy, they will be hard to maintain and could lose relevance over time. Reign in your experts’ penchants for mind-boggling cleverness and sophisticated models.

Engage early
A cost management change project isn’t just a finance and IT technical activity. You must engage early with operational decision-makers to ensure you are working towards mutually agreeable decision-relevant cost driver measures. Otherwise they won’t own it. They might even game it.

Deploy only resilient approaches
One of the benefits of having engaged colleagues is that they will ask “what if” questions about your cost management approaches. Why would you want this? To help make sure that the deployed approaches are durable and resilient – that they maintain their relevance long after the experts have gone.

Use the right tool for the job
Just because you have a hammer in your toolbox doesn’t mean you have to use it for the nut tightening job as well as your spanner. The spanner will suffice. It’s the same with cost management approaches – there are a bewildering number of approaches – you must use the right ones for the variety of cost management challenges you face. Perhaps you could use ABC for product costing, marginal costing for “on-the-fly” experimental or pilot products or variants, and target pricing for designing new products or services. You need to find the ones that work for you.

And the right tool at the right time
Some businesses conditions may lend themselves to the continuous application of a costing approach – for example, using ABC to manage product costs as a process. You, on the other hand, may decide to apply ABC for the same purpose in your business – but on a project basis to periodically take stock of product costs.

The checklist that will help you succeed:

  1. Identify the opportunities
  2. Make the case for change
  3. Get dedicated expert help
  4. Keep it simple
  5. Engage early
  6. Deploy only resilient approaches
  7. Use the right tool for the job
  8. And the right tool at the right time

There is no “correct” way of using cost management approaches; in fact, the dogmatic application of “doing it by the book” could lead to your approaches tending to irrelevance faster than you are able to maintain their relevance.

If you want to find out more about cost management, check these extra resources.