A cost takeout strategy can take many shapes and forms. In our cost reduction consulting work, we have been reducing cost inside of businesses for many years and have consistently generated double digit reductions in cost takeout projects we have completed. The critical issue in front of senior leadership is to define the scope of a cost takeout strategy. It is the equivalent of picking your battle. The choices can run the gamut from focusing on a single business process or product, to a “Wall to Wall” cost takeout initiative that looks at every aspect of the business. Cost takeout with a broader scope is often referred to as a business transformation. Each cost takeout project will have a unique set of objectives, implementation roadmap and change management strategy. Taking cost out is easy, but taking cost out without jeopardizing the business’ short and long-term performance requires a systematic approach.
Cost reduction consulting firms should use cost takeout methodologies that are based on a holistic assessment of the business model using business strategy as a guide. We include a deep dive into how technology is utilized and its cost to the business. Our cost takeout methodology follows a 3 step process in which we:
- Divide the business up into its key service, product and process elements and evaluate the cost effectiveness of each element via financial performance benchmarks and process analysis
- Look at each element from the point of view of over 125 primary cost drivers
- Identify the minimum cost to operate these elements and build upon that cost structure to support the business’s strategic needs.
Upon completion of the analysis, the difficult work of making recommendations and creating the cost take out roadmap begins. It is important that this phase is properly facilitated with the senior leadership team, because they will need to make decisions about the acceptability of various impacts to internal and external customers. Once these decisions are made, the change management strategy is critical to the success of the implementation.
The key elements to successful cost takeout initiatives include:
- Business Strategy – Clearly articulating the future state of the business
- Senior Leadership – Leading the charge with clear goals, objectives and communications
- Alignment – Making sure that every functional organization understands its role in implementing the changes and how their effectiveness will be measured
- Integration – Defining the changes in business processes, digital/IT systems, product portfolios, service catalogues, etc. that are required to support the cost take out roadmap
- Execution – Creating the right project management structure and reporting mechanisms to assure implementation success
Examples of the results of Group50’s cost takeout work:
- A client realized that they needed to take out significant cost in the operations of one of their divisions. By utilizing various Group50 methodologies we were able to reduce their cost structure by $22M while improving their service levels and financial performance
- During the course of a cost improvement project, we identified a cost takeout opportunity in a University’s supply chain. By centralizing their purchasing function we were able to identify more than $10M in synergies and sourcing rationalization programs
- A full cost takeout activity was done on a $210M division of a multi-billion consumer product company. Redesigned critical business products, relaunched ERP from batch processing to flow manufacturing, redesigned the core product offering and realized a $30M operating profit improvement. See the business case here.
Other examples can be seen here.
You can read more about cost takeout in these Group50 articles:
- Leveraging Technology for Your Next Wave of Productivity
- Change Management in a Cost Takeout Environment
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