‘Costs’ have been under pressure always……the only change that has happened in the recent past is it has come under scrutiny more than ever before. This is one most familiar word with organizations of all form & size and across all geographies. Industry has recently witnessed lot of hue & cry around cost optimization. Why? Reason is rather simple. People tend to confuse between Cost Optimization and Cost Cutting. In fact, in most of the cases cost cutting actions are being passed on as cost optimization initiatives. It could be more because of lack of understanding and ability to differentiate between the two; thus, the two words being used interchangeably.
Look back and think over? Is your organization having the same dilemma? So, what is Cost Optimization and how it is different from simple straight forward Cost Cutting.
Cost cutting is simply reducing the spend budget by slashing it down through executive decision….. most likely to protect the margins. We have seen this happening umpteenth time and will continue to see this more aggressively during our corporate life. The budgets are typically restored in next cycle if the earnings improve or more reductions are called for. What is the downside of such actions? Typically two fold – Firstly, these forced reductions in spend impacts the inherent capability of the organization in most cases. For example, open position for a key role is not filled, funding for a critical application development is reduced which will thus get delivered much later than planned, critical spares are not being stocked hence leading to longer downtime…..and MANY MORE. Secondly, the leakages continue to be what they were before as no action has been taken to address them. Interestingly, most of these leakages are not visible. On the contrary, whatever is reduced is termed as leakage; however critical they would be. Example, all travel being put on hold…..assuming travel was a leakage and has been plugged by stopping it not realizing the downstream impact of such a decision. One interesting question which no executives would like to answer………..if travel budget was a leakage, why it was budgeted in the first place? If hiring a critical role for enhancing organization’s capability was a leakage why was it provisioned in the first place?
So what is cost optimization? Contrary to cost cutting, cost optimization is about identifying the invisible leakages in cost structures of the organization and finding solutions to address them. Importantly, the solution based approach is not a blue sky approach to find fixes…….but under constraints of resources & budgets. This fact makes optimization programmes not just challenging but interesting. Cost optimizations are not about unidirectional spend reduction. They are savings to be judiciously reinvested in other areas for higher reduction in spend. The reductions are typically based on scientific analysis and well-rounded solutions thus helping to sustain the savings in the long run.
There are challenges and implications of running cost optimization programmes in the organization. The key challenge being multiple isolated initiatives, cost escalation in areas which have been addressed in the past due to lack of sustainability, lack of holistic approach as select few areas being dealt with, lack of execution continuity and effort sustenance etc. The implications are equally serious namely growing disenchantment amongst middle & senior managers with multitude of initiatives with shifting priorities, adverse downstream impacts not being analysed, fragmented solutions and unsustainable gains etc.
If all the above look familiar even partially, time to engage with experienced professionals from ShilpBodh. We bring a holistic & comprehensive approach backed with problem solving & solutioning skills to address the cost optimization issue. We build a well-integrated approach by ensuring current organizational efforts are streamlined and aligned with the strategic framework that we recommend.