It is better to manage a cost crisis before it arrives. You may not have time to act and then the crisis becomes a disaster.
I heard the story from the Chief Executive of a national low-cost airline about how much money they were able to drive out of their costs when faced with fierce competition.
That is the ex-Chief Executive, they went bust. Why did they wait for the crisis before acting? Why not reduce costs, overhead and direct, now and put the cash to better use?
We’re all used to reducing our direct costs, aren’t we? What do you budget? A 5%, 10% reduction?
What processes do you use to manage your overhead costs? Innovation? You know it works for direct costs.
Cast out the mentality that thinks of support functions as necessary and not worthy of management. The overhead functions are often more highly paid per head than the direct functions.
Budgeting for overhead costs as “last year plus inflation” is insufficient scrutiny.
Zero Based Budgeting requires those functions to justify their existence, their contribution to the business. This exercise is worth doing, at least every few years, if not every year.
Technology changes quickly, political events move prices and your organization may change what it needs too. Review your overhead to drive out costs.
The automatic provisioning of overhead services should be questioned constantly.
By example, what is the cost of extending an IT support function time from 2 to 24 hours? What is the value to the organization? Apply Value Engineering principles, what’s it worth to your Customer?
If you staff up to meet the 2-hour target, that could be considerably more expensive than a 24-hour target.
Remember to look at the whole picture when managing costs.
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