Strategic Cost Management for SMEs

Most of us have been through a situation where the organization is cutting back due to declining market share leading to poor performance. Most often than not employee retrenchment is usually the easy option for most business executives looking to manage cost.

Memories of cost management initiatives are not pleasant to most of us to say the least. The most important question we should ask ourselves is; is the cost management initiative leading to organizational growth or is it a knee jerk reaction to business failure. There are many examples of organizations such as Kenya Airways, Mumias Sugar, Uchumi Supermarket and many more that have initiated cost management initiatives due to prolonged poor business performance; whether such initiatives have borne fruit in terms of leading growth or not is a question for another day.

Most organizations fail or are ineffective in their cost management initiatives is because they cut cost generally that are not correlated to the organization’s strategic plan hence such cost management initiatives are unsustainable. Similarly most organizations from experience wait until the business is experiencing difficulties for them to come up with cost management programs; a situation which leaves little room for proper synthesis between short and long term tradeoffs.

Model organizations on the other hand link cost management with their strategy hence cost management is a strategic tool that in which redundant cost are cut while cost that lead to productivity and growth are incurred.

Management teams at such companies spend a lot of effort separating out the costs that truly fuel their distinct advantage from the ones that don’t. They base their decisions about where to cut and where to invest on the need to support their greatest strengths: the capabilities that enable them to create unique value for customers. This important distinction is a way of life at leading companies we have studied, like safaricom, EABL and BIDCO . They cut costs to grow stronger.

The question you may be asking is how I can help my organization manage cost the correct way. Five things must be done to achieve this.

First and foremost cost management must be connected to your overall strategy. Every opportunity on cost management must be geared towards reinforcing your value proposition. You must first develop budgets which prioritizes your strategic objectives.

Second, rethink costs in terms of capabilities. In many companies, the investments you make in capabilities are hidden within an array of functional budgets. Unravel these budgets and sort out the strategic implications of your current spending patterns. It’s not easy to do, since most conventional expense-tracking systems don’t assign costs to capabilities

Third, list all the expenses related to the activities of the enterprise, move them into a metaphorical “Silo,” and then, one by one, decide whether to let them back in. Distinctive capabilities will get the resources they need to realize their full potential. You’ll pay for them by cutting everything else. This is based on the budgetary concept of Zero based budget which enables you to break free of the budgetary practices of the past.

Fourth, make your cost-management plan sustainable. Build financial systems that create more transparency around “good” costs, those associated with differentiating capabilities, and dispensable “bad” costs, leveraging your culture to increase awareness of the difference. Closely link your budgeting process with your strategic planning process to ensure that differentiating capabilities continue to receive disproportionate investment, while other expenses are tightly managed.

Last, be proactive. Fix the roof while the sun is shining. Once you’re in trouble, you may not have the luxury of making the right kinds of decisions. Creating a continuous cost-management mindset that connects costs to strategy is the best way to ensure that your company never gets out of shape.

Managing cost in this way will give your organization the freedom to make the right choices over the long term, choices that are required to close the gap between strategy and execution and the rewards are immense.