Strategic Cost Management
The Cecere Group’s Outsource CFO services works collaboratively with the company’s management team to develop a strategic approach to cost management. Strategic cost management (“SCM”) seeks to evaluate costs to determine their alignment with the organization’s business strategy. The objective of SCM is to allocate resources/costs to those business activities that will provide the highest returns and away from low margin or negative margin lines of business. When this approach is followed, the organization will achieve optimal efficiency from its resources.
Focus on High Value Business
The SCM priority is to maximize value rather than volume or costs reductions. The reallocation of costs away from low value business toward high value business is a one way to maximize value. The focus is directed at optimization to ensure the business remains focused on its business strategy. SCM can’t be successful in a vacuum. It must be adopted and embraced throughout the organization.
- Present a clearly defined business strategy with business initiatives that are understood throughout the organization.
- Conduct a critical review of costs throughout the organization and differentiate those that are directly supportive of business initiatives (productive costs) and those legacy costs that may be considered non-essential (non-productive costs).
- Integrate cost awareness and optimization into the culture of the organization. Elevate SCM as a strategic business initiative to be embraced throughout the organization.
SCM will put the organization in a position to be better equipped to deliver on its business objectives with a clear understanding of which costs are tied to strategic objectives. Without a clear understanding of which costs to retain and which to remove, progress can’t be achieved.
Investment vs. Cost
Organizations that practice SCM tend to view their spending as more of an investment than a cost. They make spending decisions in support of strategic objectives as they consider the value the objective will deliver to the organization and customers.
Key Points:
- SCM seeks to reallocate spending to strategic initiatives away from low value activities.
- For SCM to be successful, it must be embraced by the entire organization, which should have a shared vision of how the organization moves forward.
Corporate Culture
The greatest obstacle that organizations face when introducing SCM arises from within. Departmental managers can be fiercely resistant to expense reductions affecting their operation that will be used to fund other initiatives. The compromise position that is often reached is to apportion cost reductions across the board to share the burden throughout the organization, however this process merely serves to extend the legacy cost structure and provides no strategic value.