01 July 2009

Setting 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 that I talk to feel that they require a more fundamental approach that will 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 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.T. Kearney (definitely the consultant to go to if you need broad external help in carrying out a transformation (see http://www.atkearney.com)/) I 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 that I have seen in very many situations is that the transformation becomes an endless and uncontrollable process with different parts of the organization moving forward at different speeds. In my projects I have solved this problem 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 I have divided the transformation into three phases. The first phase of my cost-reduction projects have focused on understanding the key issues and setting realistic targets for improvements. The second phase has focused on the actual re-design of the new processes, while implementation has taken place in the third phase.

Many transformation projects I have seen have been plagued by unclear goals and targets. I agree that the start of a transformation process should include broad high-level goals that are, almost by definition, not tightly defined. However, in my projects I have always used the first phase of a transformation 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 has typically given the project 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. To avoid this pitfall I have set up an appropriate small team at the beginning of the transformation and expanded this team over time. For the initial phase of a transformation I have strived to put in place a fairly small team that consists of a selection of people from across the company representing different organizational units and skills. The people chosen for this task have been analytically strong, open for change, and well respected through-out the organization. In the re-design phase the members of this team have typically 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. To avoid this, my transformation projects have always included a steering committee that consists of key decision makers. If the transformation covered a total company this was the management team. The key challenge that I faced was to ensure that the steering committee understood and agreed with the overall process (phased approach, etc). In addition, they had to agree to a governance model that included clear decision points (certainly at the end of phase 1 and phase 2, but probably also at other key milestones). The steering committee also needed to agree to a generic set of rules that included 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 you in setting up a successful transformational cost-reduction project. Follow the links if you are interested in more information on project planning or project management training.

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