Every leader is faced with examining their cost structures and managing expenses even tighter in this current market. However, do you have a structured decision framework to balance or prioritize the many waves of proposals coming at you?
Placing the following decision points for your use.
6 key considerations
The framework outlines six areas for leaders to consider as they evaluate the sustained efficacy of cost proposals.
Potential financial benefit. Establish to what degree cost initiatives will impact the bottom line. Ask: How much will my enterprise save if the action is implemented? How does the action affect enterprise cash flow?
Business impact. Determine what impact an initiative will have on your employees and the operations of a specific business unit or function. Ask: What will the adverse impact be on day-to-day activities and operations, such as decreased productivity or product time to market? If cross-functional peers and direct reports fail to grasp these effects, initiatives may fail.
Time requirement. Whether you approach cost optimization initiatives via a waterfall or an agile approach, it will take time for the enterprise to realize the cost savings and improved business value. The question is what that time frame needs to be. Ask: Can we capture and realize cost savings within the desired time frame (weeks/months/fiscal year)? How do we measure soft savings with this initiative?
Degree of organizational risk. The effectiveness of the cost optimization initiative may depend on whether you and your direct reports are capable of changing and adapting to new organizational processes. Ask: Will our direct reports ensure the changes are made? Is our enterprise capable of adapting to the changes?
Degree of technical risk. This risk sits squarely in the domain of your IT leaders, but IT and other executive and functional leaders must work together to assess how the cost optimization initiative will be integrated with their current operations, enterprise architecture, etc. Delays caused by or attributed to the initiative could result in a loss of service delivery or productivity. Ask: Will the change undermine the ability of our systems to deliver services? Will this change cause delays in enterprise operations that impact a few or many components of the architecture?
Investment requirement. Cost optimization isn’t about cost reduction; it’s about sustained improvements in business processes, productivity, time to market, etc., so some initiatives will require an initial investment — which the executive board must agree to fund. Present a business case showing the potential business benefits vs. the status quo and the level of investment required. Ask: Does the initiative require a large, upfront investment before savings can be realized? Is our enterprise willing to make an investment at all?
Although a decision framework is only one important step in the cost optimization process, it provides perspective through which to evaluate cost ideas across functions. Consider grouping initiatives together and mapping them to a grid to easily visualize the effort required and the relative benefits of each initiative. This will make it easier for cross-functional teams to see the strategic and organizational trade-offs of the various options.
Importantly, a programmatic approach may show that the cost optimization options with the greatest potential benefit often require additional investment, take more time and carry more risk than low-hanging cost-cuts, which are easy to implement but don’t yield sustained value.