Six Steps to Deploying a Cost-Containment Strategy

Offer the same information to intelligent people having similar values and they will come to roughly the same conclusions.  Prove this to yourself by giving each person in a group two identical highway maps.  Have them plan individual journeys beginning in the same city but finishing wherever they choose, highlighting their route without discussion.  Though they begin in the same place they end up all over the map.

Next, specify the city of origin and the destination.  Have them highlight the most direct route.  Notice they will choose nearly the identical course.

The essence of leadership is to help people understand where they are, their destination and why they should make the trip.  When people grasp the issues and objectives and are allowed to participate in solutions they are more likely to support them.  They are also more equipped to make insightful course corrections when things inevitably change.

Cost-containment is frequently a journey equated with layoffs rather than innovation.  Done correctly, freed-up capital is redeployed more profitably: stimulating growth.  Management’s role is to assess the situation, give direction, set targets and then provide a forum for those closest to the issues to find a better way.

There is a route for this pilgrimage:

Step #1:  Set Financial Targets by Department

Assume management wishes to reduce indirect costs as a percentage of sales. The first step is to pick an aggregate goal.  Next, forecast the budget for each department over a 3-5 year period based on a high, low and mid-point.  Calculate savings based on reductions of 5%, 10%, 15% and 20%.  Set department targets that add up to the aggregate goal.  Management has now established the current state and the destination by department. (By converting these targets to a percentage of sales they can be adjusted for revenues at appropriate intervals.)

Step #2:  Identify Savings Targets & Improvements by Process by Department

To make the handoff from Finance to Operations each department will need to target specific improvements to achieve their savings goal.  If the company is using Activity Based Costing (ABC) they will know how much time and money is spent on a given process by department.  If they are not using ABC they should strongly consider doing so.  Tracking the flow of costs from the P/L to department, to the activities performed within that department, to the high-level processes, to those who consume the outputs is an education in itself.  Accurate cost data supports better decisions and creates incentives to partner in solutions.

Using the best information available assemble a cross-functional team for the targeted process.  Take the total cost of that process. Calculate savings based on reductions of 5%, 10%, 15% and 20%.  Pick efficiency goals for each process that add up to the department’s savings goal (identified in Step #1).

Management has set the destination but left the route finding to those doing the driving.  We now have savings goals by department and process.  The cross-functional review prevents cost-shifting from one department to another and is usually required for breakthrough results and larger wins.

Step #3: Create a Savings Roadmap by Department

A roadmap of initiatives will emerge.  Categorize these as short-term (1-3 months), medium-term (3-6 months) and long-term (6 months or greater).  Schedule their implementation based on impact, cost, difficulty, readiness and whether they are milestones for strategic initiatives.

The roadmapping process creates alignment and prioritization.  While there will be tradeoffs and hard conversations, the business is constructively wrestling with the issues.

Step #4: Establish Change Governance

Change Management occurs at the executive, functional and project level.  This cannot be ignored.

The Executive Team – There must be a guiding coalition of executives representing various business units.  This team is headed by an executive sponsor, preferably the CEO.  The guiding coalition provides strategic direction.  As with the original example, this includes the current state, the reason for change, and the destination.  The executive team owns the Savings Roadmap (described in Step #3) and enforces compliance.

Functional Steering Teams - At the operational layer cross-functional teams are usually required for collaborative solutions.  They identify problems, vet options, and interface with the Executive Team to recommend the best alternative.

Functional Steering Teams commission project teams.  They do the blocking and tackling within their business units to ensure solutions are driven.

Assuming there is a Project Management Organization (PMO) or operational excellence group (Six Sigma, etc.), they will work with departments and Functional Steering Teams to develop and manage the Savings Roadmap, provide analytical support and coordinate project teams.

Project Teams – Project teams are commissioned to accomplish specific tasks such as developing recommendations or implementing solutions.  They report to the Functional Steering Teams who ensure they have the resources and political cover to be effective.

Project teams are excellent proving grounds for “up-and-comers.”  Emerging leaders are given responsibility, bracketed by help, and can be mentored.  They gain recognition, feedback, and valuable experience. 

Step #5:  Pilot Success then Scale and Replicate

There will be a proving stage to establish credibility and build momentum.  Departments should select 1-2 pilot projects from the Savings Roadmap.  Good pilots are quick wins and have three criteria: 1) There is greater than a 3:1 financial return, 2) They resolve an organizational pain point felt by all and 3) They are aligned with strategy.

The pilot projects test and build the effectiveness of teams and leaders as they overcome obstructionists and obstacles.  Using the governance model described above, continue following the Savings Roadmap to achieve the goals while building the organizational discipline for continuous improvement.

Step #6 (and Summary): Decide Who Owns Performance

It goes without saying that this approach requires strong leadership.  One senior executive must take personal ownership of the process, the Savings Roadmap, forming and governing the various teams, and achieving the targets.   This person OWNS performance.  Choose this “Performance Champion” wisely!  Now get the right people in a room and pass out the maps.

The Three Essentials for Driving Change

In The Art of War, Sun Tzu writes, “Regard your soldiers as your children and they will follow you into the deepest valleys; look upon them as your own beloved sons, and they will stand by you even unto death.” While organizational change rarely demands the ultimate sacrifice, great leaders understand that it can crush or lift the human spirit. As King Solomon wrote, “Where there is no vision the people perish.” (Prov. 28:19 KJV).

Most people actually support change—as long as someone else is doing the changing. The fact is that unless people collectively perceive a threat; unless they individually believe in a larger mission; unless they personally understand the sacrifices to be made, they will rarely lend their full support.

There are “Three Essentials” for mobilizing change across organizational lines. Until these are present and communicated by the senior executive, change agents will die a lonely death on a distant hill. These three essentials are a Burning Platform, a Shared Vision, and an Executive Mandate.

Burning Platform

Fire is one of the greatest threats to those who work on offshore platforms. Several miles from land, when fire breaks out at sea, people must choose between extinguishing the flames and swimming with the sharks. It does not matter how well they get along; on a burning platform they have a collective problem they must solve.

Leaders wishing to get their organization moving must identify a crisis. They may even have to manufacture one. The threat must be real, immediate, and affect each associate personally.

Shared Vision

The Burning Platform may get people moving but they have to converge on something positive. There must be a Promised Land that makes crossing the desert of change worthwhile. Otherwise, they are operating in crisis, motivated by fear. This is neither constructive nor sustainable in the long term.

Since people have what’s in it for me? written on their foreheads, the Shared Vision must hold something for all stakeholders. There are three important elements to an effective Shared Vision:

1. The Shared Vision must offer a significant financial win. Corporations have an obligation to shareholders to give them a return on investment. Talking about widgets per hour or how much better people will “feel,” while perhaps important, rarely strikes a chord with investors.

2. The Shared Vision must solve an organizational pain point felt by all. It is a mistake for leaders to appeal to the masses by speaking only in aggregate financial terms that benefit someone else. By addressing operational pain caused by ineffective and inefficient processes, policies, or practices, management communicates to their associates that they are in touch with real problems.

3. The Shared Vision must create a competitive advantage that protects against short-sighted solutions. The Shared Vision becomes that point on the horizon toward which all boats may steer while making the course corrections for their individual situation.

Executive Mandate

Leadership begins and ends with the sponsorship of a high-ranking senior executive. An Executive Mandate will describe what is expected and establish that non-compliance is not an option.

To create and communicate an Executive Mandate, the executive sponsor must:

1. Declare a Strategic Intent: Strategic intent is a high-level statement of where a company is going and how it intends to get there. Strategic intent helps others align their actions with the larger strategy.

2. Empower a Guiding Coalition of Senior Executives: A wise CEO will take a first cut at the Burning Platform, Shared Vision, and the Executive Mandate. He or she will then organize a cross-functional coalition of executives to flesh out the details. This communicates the issues and gives senior executives a chance to put their personal stamp on the strategic direction.

The Guiding Coalition must reach consensus about where the organization is and where it is going. Remember that consensus does not mean 100% agreement. It means that each member agrees to publicly support the decision of the group regardless of personal opinions.

3. Mandate a Governance Model: Linking strategy to execution requires governance at the executive, functional, and project level. There must be a forum for vetting and fact-based decision making. There must be a path of escalation all the way to the CEO for making decisions and resolving disagreement.

4. Commission and Focus Resources: People and resources must have permission to spend time on the change effort. Subject matter experts and project team members must not be put in the position of defying an immediate supervisor in order to participate.

5. Set and Enforce Standards: The senior executive must establish and communicate standards of performance and participation. They must also be willing to deal with obstructionists and ineffective leaders. There are few things more frustrating, or that will kill a change initiative faster, than a CEO who says the words but is not willing to follow up with consequences for those who defy the mandate.

In The Art of War, Sun Tzu further writes, “The victorious strategist only seeks battle after the victory has been won, whereas he who is destined to defeat first fights and afterwards looks for victory.” The seasoned executive will spend time in counsel with a guiding coalition of committed leaders. Only when they have defined the Three Essentials and are prepared to personally enforce participation are they ready to ask others to make the sacrifices that effective change requires.

What’s Your Company’s IQ (Innovation Quotient©)?

Your industry is changing. There are enormous pressures to develop new products and services, cut costs, reengineer processes, and segment the value and supply chains based upon complex and sustainable customer and supplier relationships. Success in the past is no guarantee of success in the future. Considering these developments, do associates view innovation and change as a source of job security or a reason for mutiny?

Innovation (as discussed here) does not refer to Research and Development. It refers to the cultural ability to align associates and draw from their diverse views to form creative concepts and solutions. It refers to those associates’ willingness to participate in and support those solutions. This competence can be defined and measured as a company’s Innovation Quotient© (IQ).

The “Innovation Gap©” occurs when some are making bold and necessary choices while others are protecting fiefdoms or clinging to the past. This cultural clash creates delays and waste, erodes value, and threatens survival.

An organization’s “IQ” has four perspectives that can be remembered by the acronym IDEA©:

Insight refers to the company’s internal and external scanning skills.

Decision Making speed and accuracy depends upon people’s knowledge and empowerment.

Engagement & Execution is best accomplished by enrolling people in their own solutions.

Alignment with Strategy is achieved through cascaded objectives, measures & initiatives aligning four functions of performance: Strategy, Financial Planning, Business Execution and Operational Excellence.

Based on these perspectives, if we were to measure where a company fell on the spectrum of innovation, it could be described by one of four innovation profiles:

Ships Adrift float on past success and are poorly positioned to respond to threats or opportunities.

Cruise Ships have a few individuals setting direction and making course adjustments.  The remainder are “Intellectual Passengers.” Change is presented like a destination brochure rather than a roadmap for associates to follow.

Merchant Marine empower associates to effectively and efficiently deliver existing services to existing customers, having ownership and making course corrections

Navigators are those innovating new products, markets, and ways of doing business

The Innovation Gap© gap accounts for the resistance that causes many change initiatives to fail.  Closing the gap is more than a feel-good experience.  When a company is changing its business model, survival can depend upon it.

Apply the Six Sigma DMAIC method to close the Innovation Gap©.

Define: Define the attributes of the four IDEA perspectives: Insight, Decision Making, Engagement & Execution, and Alignment with Strategy.

Measure: Set specific examples of each attribute that might represent the behavior expected from a Ship Adrift, a Cruise Ship, the Merchant Marine, and from Navigators. Think of specific examples from the four functions of performance: Strategy, Financial Planning, Business Execution, and Operational Excellence. Assess and compare Senior Executives, Middle Management, and line supervisors and their organizations.

Analyze: Compare the three groups, noting gaps and exploring root causes. Think in terms of the impact a specific change initiative may have and what corrective actions are appropriate.

Improve: Set objectives, measures, and performance scorecards to address and close gaps.

Control: Set acceptable standards of behavior for each of the attributes. Using working teams from Strategy, Financial Planning, Business Execution, and Operational Excellence, along with the internal customers of these groups, develop specific examples for each attribute that represents Unacceptable, Acceptable but Average, and Exemplary performance. Also, define response plans for attributes that are out of control.

Understanding your company’s Innovation Quotient and identifying its Innovation Gap is critical to success and growth.  The process of defining its attributes, setting standards, and establishing controls has enormous cultural impact. Associates themselves are setting the standards and determining how they will be enforced.  By identifying the affected areas before a change initiative gaps in understanding, incentives, and alignment can be isolated and corrected before the ship is in the storm.