6 minute read
In this article, we will look at a simple method for cost reduction and simplification based on a straightforward, transparent method that preserves the strategy and gives everyone clarity about what is being cut and why. When done correctly, this can be seen as both prudent and healthy but importantly reduces the political storms and squeaky wheel syndrome which can often hamper effective cost optimisation processes and lead to a worse position than when you started.
This method is particularly relevant for us in the UK where recession is due very soon, but I also hope this is a useful method for those not in recession as a way of continuing to ensure the organisation is lean and focused on strategic outcomes.
This content is based on our StrategyWorks strategy execution framework which is designed to help you to execute your goal focussed strategy as quickly and efficiently as possible.
Knowing what to cut and why
As with all recessions, the focus for many organisations now is battening down the hatches and cutting wasted spend as quickly as possible. But for many leadership teams, the challenge is knowing what to cut and why. What do we really mean by wasted spend and how do we measure it?
Cutting the wrong things could yield unintended consequences affecting growth or other strategically important outcomes. It is beneficial to focus resources on the projects and programmes that add the most value but what do we prioritise? Do we prefer the continued implementation of strategy, or should we focus on short-term revenue or profitability?
Being able to determine which projects and programmes are driving the most effective future performance of the organisation can be challenging for many organisations that haven’t aligned execution on strategy before.
Is there a way we can use the recession and simplification to focus on what is really important and drive growth faster and more effectively? I am going to argue if done correctly, this can be a positive process.
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The problem of performance measures
Initiatives and projects can contribute both to KPIs and performance measures throughout the organisation each of which can contribute to more strategic goals in a typical cascading OKR/performance hierarchy.
But, how can we make sense of this and know what the impacts of cuts will be?
For some teams, the reality is, this kind of analysis becomes so complicated and the data on what is really adding value is missing, so cuts become little more than a gut feel exercise of the leadership team behind closed doors.
To those inside the organisations not included in the planning of cuts, it can feel like the Vatican’s appointment of the new pope, with no transparency of what happens behind closed doors. The result is presented as a finished framework with de facto received wisdom.
What can then follow are a series of cuts which bear little relationship to the immediate or long-term goals of the organisation.
The ensuing storm of objections can take months to resolve and create cultural havoc and disinterest.
A problem with this unstructured approach is everybody makes a strong case for the need to continue with their projects and programme and it takes a strong leader to be able to cut through the noise and determined what's really adding value.
Without understanding what performance measures projects, programmes and initiatives contribute to and the contribution of underlying operational performance measures to organisational goals, who is to say what is really of value and therefore what is best to cut?
Without understanding what performance measures projects contribute to and the contribution of operational performance measures to organisational goals, who is to say what is really of value?
If you’re in the process of planning your next year's strategy and trying to identify what's really adding value and what isn't, the key question is, how do you know what is really adding value and what would you cut?
What if you could use a method to cut costs that was clear, transparent, fair and importantly could be shown to accelerate your strategy and drive long term growth?
Traditional methods for cost reduction
The traditional method of cutting takes two forms. Firstly, an initial pass through the portfolio to identify any discretionary projects that can be immediately cut or deferred. This is typically uncontentious and can result in modest cuts. If you follow our strategic alignment framework, these should be few, but where short term business-cases arise there may be some obvious candidates.
Once the discretionary projects have been removed, the next question is, what else can we start cutting into? What will be impacted and how far into the cutting process should we go?
Should we take for instance a shallow cut across all areas of the business and ask all leadership members to remove a percentage from their portfolio (take a haircut as it's commonly called)?
The working idea is predicted on the assumption that programme or project managers have already added in sufficient contingency, expecting cuts, and therefore, any cuts will have little or no material impact on the quality or outcomes of the project.
While adding contingency is good practice, few initiative risk registers are bold enough to mention the leadership team's arbitrary cutting strategy as a leading risk to success.
Alternatively, should we identify major projects and programmes which, while they might be contentious, we can drive deeper cuts and therefore deeper cost removal in one part of the organisation and spare potentially more damaging unilateral cuts across the board?
It’s akin to the perennial UK’s High-Speed Rail link HS2 debate which raised its head again in the House of Commons recently, with some viewing the eye-wateringly expensive programme as discretionary and therefore can be scrapped when times get hard. Others view it as a core infrastructure change, central to governmental strategy and therefore critically important to drive future growth in the economy.
The same question holds true for organisations when times get tough. Should we continue to build core platforms in times of contraction or just focus on immediate business and focus on driving organic growth?
The challenge with both methods is that regardless of which strategy you take, cutting inevitably leads to a strong reaction from internal stakeholders and customers. To help alleviate this, the rationale for cutting should be clear, and the links to the execution of the strategy should be transparent.
For many organisations, particularly those with a strong balance sheet, cutting really is a choice. But it's one that can be popular with shareholders or markets, neither of whom are typically involved in the production or execution of the strategy.
The strategically focussed cutting method
I have sympathy with the idea of deferring or entirely cutting longer-term speculative activities to focus on the immediate future that will continue to drive revenue and/or profitability. This is an understandable natural reaction when faced with the need to simplify, but I would argue the wrong one for long-term benefit and should be tempered with strategic thinking to focus on what’s important for sustainable growth.
When times get tough and markets are turbulent, I believe it is important to remain strategically focused, adaptive and open to opportunities that inevitably arise.
would recommend considering a different method to prioritise the simplification the portfolio based on contribution to your strategy. The projects of highest strategic importance remain, others which have more tenuous links are candidates for removal, as follows:
- Clarify and ratify objectives. Are your objectives still the same or has the change in markets affected them? (If they are long-term enough, they shouldn’t but it is worth checking both long- and short-term objectives)
- Re-review performance measures in the light of changing markets and determine whether the performance expected needs to change (either up or down based on opportunities and resources available).
- Reassess the chosen strategy (if one has explicitly been defined). Strategy is ultimately about making choices and selecting one path over another for a reason. The strategy is the choice that has been made of how to achieve objectives. For example, the objective of growth will be achieved through an active strategy of M&A rather than organic growth of existing products in existing markets. Assessing whether this choice is still valid given the economy and environment or has this shifted the choice that would have been made if your time were given again?
- Reaffirm or define what are the measures that will show whether the strategy is successful (e.g. leads/opportunity/revenue/feedback measures).
- If the choice would be different, go back and reassess whether short-term change is required or whether a wholly different strategy is required. In our view, a strategy is a hypothesis. It's an idea of what will work. It needs testing and consistent attention and revalidation. Has anything changed? Is the hypothesis still correct? If not, what do we change and why? How do we re-test?
- Refocus on the initiatives that really drive the progress of the strategic choice in the short term. Then, identify the parts of the organisation that must collaborate and contribute to successfully deliver the initiatives and the outcomes on objectives expected. For instance, growth requires a marketing strategy, a sales strategy, a product strategy, etc.
- Clarify within those initiatives specifically the contributions of projects and programmes to performance measures
- Ranking projects and programmes which are likely to drive the biggest performance against strategy over the period you're looking out for example the next year based on their business case and contribution to performance measures (either strategic or operational)
- Identify anything which is essential for compliance, ongoing operations, or for continued customer delivery and excellence.
- Anything else that doesn't fall into these categories falls into a final category. This category becomes the hunting ground for cuts. Take a zero-based budgeting mindset and ask from first principles why is this project required. Everything else is retained until further cuts are required (if at all).
This final category of projects and programmes becomes your list of cutting candidates. Within this category, you could choose to cut across a range of different departments equally as mentioned above or cherry-pick related groups of projects and programmes that could be removed wholesale because they don't drive the strategy clearly or that could be deferred to a later stage.
This simple method ensures that you can continue to drive your strategy and that you have confidence in the portfolio's contribution to outcomes and enables you to clearly articulate why certain projects and programmes will be cut or deferred without contention.
The challenges of cutting large portfolios
While this framework is set out in a straightforward way, there is potential for significant complexity in real-world analysis caused by several factors.
Firstly, at planning time before any projects and programmes have started, it may be relatively easy to understand the expected return on investment from projects and programmes from their project or programme initiation documents or any briefs that have been generated.
However, once projects and programmes are in progress and investments have already been committed, it can be more challenging to cut projects which have deferred benefits. For example, a programme that has only recently kicked off and is capital intensive at the start of the project with deferred benefits could make a strong case that it would not make a good cut target because the benefits will be coming later in the programme.
However, I would argue that if the benefits are still not strategically aligned in the immediate term the investment made to date should either be deferred or mothballed regardless (see previous HS2 argument).
Additionally, once projects are in flight, the benefits accrued at any point in time may not reflect future benefits which may be harder to come by. Whereas the cost of ongoing implementation may continue to rise
The impact of dependencies
One of the factors driving further complexity is the impact of dependencies between initiatives, programmes and projects. Some dependencies may be known and can be factored into the analysis, however, some may not become clear until further analysis has been completed or projects are already running.
The impact of dependencies could mean that cutting programmes with heavy dependencies on strategically important work can have dire consequences on the ability to deliver goals and outcomes. Try to map dependencies as early in the process as possible to avoid this trap.
I have tried to keep the method above as simple as possible and many of the initial steps may only need to be performed once. However, the complexity of this process is understanding the true scale of delivery, the cross dependencies, and interactions between projects to drive initiatives.
Strategy execution software
Many of the challenges of real-world cost reduction and simplification can be alleviated by strategy execution software which can account for the complexities at scale and know the impact on strategy.
Effective strategy execution software can track both the execution and the impact of delivery (or failure) on outcomes and means that the analysis is faster and easier to understand particularly as things change. Without this rich data-driven analysis, the task can rapidly become extremely laborious and complicated on a large portfolio of work.
However, once the link between strategy, performance and execution is formed, making the case for cutting non-strategy contributing activities becomes easier, faster, and less contentious. As a result, it creates focus, consensus and strategic agility. This often seen as the holy grail for strategy execution success.
What do you think?
Is this a useful method and would it work in your organisation? What else have you seen work? We would love to hear your experience.
Finding out more about strategy execution software
No obligation strategy review
We also are happy to offer a no-obligation, in-confidence review of your plans to simplify and to help develop ideas on how you could improve your cost-cutting exercises and focus on strategy.
If that’s of interest, please do contact us.
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