Leading the Cost Optimization Movement

While cost optimization should be a priority for all companies regardless of the economic cycle, the reality is that when times are good, it's on the back burner, and during a downturn, it becomes critical. Before handing out those pink slips, finance executives would be well-advised to take a holistic look at their organizations to ensure that any changes they propose are strategic and sustainable.

The Changing Role of CFOs

There is no question that the role of the CFO has evolved significantly over the past few years. As finance departments have moved from an inward-looking function focused on financial reporting and controls to one focused on improving business performance, CFOs have begun to play a more strategic and operational role within their organizations. As organizations are being asked by their stakeholders to improve performance, enhance revenue, optimize costs, and reduce risk, CFOs today have a tremendous amount of responsibility to deliver. Indeed, operations improvement, growth, and business risk have become equally pressing for the CFO.

With this broader perspective, CFOs should now be better prepared to tackle cost optimization from a strategic, enterprise-wide perspective. While it may be easy to see how a more strategic approach to cost management is integral to a CFO's expanded responsibilities, the difficulty lies in actually achieving the desired results.

Common Cost Optimization Pitfalls

According to a 2007 KPMG survey of more than 400 companies worldwide, 9 out of 10 cost reduction programs fail to achieve their targets, and gains that are achieved are typically short-lived. Here are some of the most common pitfalls:

• Cost drivers are not clear. Companies need more insight into what drives costs in their business to ensure that cost-cutting is targeted at the right places and that the success of cost management initiatives is properly measured.

• Cost strategies are too cautious. Companies often pick the easy options for cost initiatives, rather than the ones that will yield the most savings. While budget and head count reductions provide short-term cost savings, reducing complexity and improving process efficiency can yield significant and lasting benefits, but only if they are conducted rigorously. Companies must also be prepared to adopt major changes to their business models in order to remain competitive.

• Cost discipline is not embedded in the culture. Every person at a company has a role in cost management, but responsibilities are typically unclear in many organizations. A clear strategy and open communication are vital to the success of any corporate project, but even more so around cost-cutting initiatives, where employees understandably can feel threatened by change.