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Tuesday, June 30, 2009

How to Set Up a Successful Cost-Reduction Project

Almost every organization in the world today is looking at ways to reduce costs. Some companies can do this fairly simply by closing factories or giving top-down targets to all relevant departments (costs to be reduced by 20%). Other companies feel that they require a more fundamental approach and restructure the way that they do their business. Sometimes this includes a strategic review of which products and services should be offered to the market, other times the markets served are seen as stable. In the second case there is usually a need to fundamentally re-assess how the products / services are brought to market in order to radically decrease the costs and/or to improve service levels.

Carrying out such a task will, almost by definition, require a project, and such a project will always be extremely complex (both due to external political issues and the required out-of-the-box analytics). Based on experience in setting up and carrying out numerous strategic transformation projects for a major global strategy and operations consulting company we believe that there are a number of very dangerous pitfalls for such projects, but that these pitfalls can easily be avoided by carefully thinking through how the project is set up. The key pitfalls and how these can be avoided will be covered individually.

A very common problem is that the transformation becomes an endless and uncontrollable process with different parts of the organization moving forward at different speeds. This problem can be avoided by dividing the overall transformation into clear phases, and forcing all the individual parts of the transformation process to stick to the same overall milestones. Typically the transformation should be divided into three parts. The first phase of such a process should focus on understanding the key issues and setting realistic targets for improvements. The second phase should focus on the actual re-design of the new processes, while implementation takes place in the third phase.

Often transformation projects are plagued by unclear goals and targets. The start of a transformation process should certainly include broad high-level goals. However, the first phase of a transformation should be used to develop a detailed understanding of the situation and key issues faced by the company, to make an overview of key changes required (by how much do costs need to be reduced in order to be competitive and profitable?), and to suggest the overall direction of possible improvements. Combining the results of these activities should give clear goals and targets for the individual parts of the transformation process.

Transformation projects are often plagued by difficulties in avoiding departmental politics and getting real end-to-end improvements in processes. The solution to this pitfall is to set up an appropriate team at the beginning of the transformation and expand this team over time. For the initial phase of a transformation a fairly small team should be put in place that consists of a selection of people from across the company representing different organizational units and skills. The people chosen for this task should also be analytically strong, open for change, and well respected through-out the organization. In the re-design phase the members of this team are likely to become team-leaders for the sub-teams looking at individual processes or parts of the organization.

Transformation projects often have problems in enforcing decision-making and the implementation of agreed changes. A key step in enabling this is to set in place a steering committee for the transformation process that consists of key decision makers. If the transformation covers a total company this is likely to be the management team. The steering committee has to understand and agree with the overall process (phased approach, etc). In addition, they must agree to a governance model that includes clear decision points (certainly at the end of phase 1 and phase 2, but probably also at other key milestones). The steering committee should also agree to a generic set of rules that include free discussion up-front, but a commitment to the implementation of made decisions (agreed is agreed).

Carrying out these fairly simple structural changes to the transformation process has served me well in all the projects I have carried out, and I believe that they will also help companies and organizations setting up internal cost-reduction programs.


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