Strategic Cost Reduction

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?

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 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.

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.

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

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.

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.

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. 

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.