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6-Step Approach To Radical Cost Savings

By N.Y. Ho
Director - Business Solutions Group (

The World Is Flat

The world is a much flatter place than ever before where cheap global telecommunications, instantaneous electronic file transfers, lowering of trade and political barriers have removed all barriers to international competition. Our “flat world” has brought competition right to our very doorstep and the new economy will effectively eliminate the weak and hesitant, whilst it uplifts the bold and forward looking.

Contrary to some beliefs, we are not in the middle of a global recession but rather at the very beginning of it. Do not expect things to get better next week, next month or even in the next year. Many jobs will be at stake, so too will the survival of many companies be in question. An economic downturn just simply hurries it along.

How Should We Respond?

So how exactly should we respond? Do we embark on the usual series of belt-tightening measures and across-the-board cuts or do we actively seek out fundamental strategic and structural improvements for the company?

The answer maybe obvious, yet not many companies know the right way to go about doing this nor do they have the appetite to take risks in uncertain times. The likely result is most companies will tend to follow the age old approach by deferring expenses, reducing annual budgets, declaring hiring freezes, reducing training, limiting travel, improving processes, renegotiating material prices and often times cutting headcount. We’ve seen it happen all before. As long as we continue to think we can just save ourselves to prosperity, we will continue to experience these cyclical upheavals every so often.

Is Continuous Improvement Good Enough?

The good news is most companies have been paying attention to cost reduction initiatives by way of lean and six-sigma for process excellence, etc. The bad news is even with the addition of these crises-driven cost saving measures, we can only achieve modest improvements of 5% to 10% at most. Obviously, these alone will not help us weather the storm.

To understand the journey that we must take, let us begin by examining the primary cost levers. The potential savings each of these cost levers brings will vary according to industry type and company size (see Figure 1).

Cost Savings

Think Big To Survive

Continuous improvements with incremental savings may suffice during good times to keep the shareholders happy, but it is the ‘think-big-get-big’ double-digit cost savings that comes from rationalizing the company’s infrastructure, improving the business model and developing a scalable cost structure that will sustain and keep the company healthy through these challenging times.

Higher cost savings simply means you get to protect your margins through lower COGS, beat the competition, expand market share and position the company for future growth. Moreover, a scalable cost structure allows the company to respond to market fluctuations, capitalize on opportunistic acquisitions, as well as free up resources to develop new advertising, marketing, products and services that allows the company to stay ahead of its competitors. Hence, a downturn may not be a bad thing afterall provided you are fully prepared for it.

6-Step Approach for Radical Cost Reduction

Now that we have your attention to focus beyond incremental cost savings, here is a recommended basic 6-step approach towards cost reduction.

1. Start with the end in mind - When embarking on a cost reduction exercise, it is important first and foremost to understand the company’s required savings objective and the amount of time available for it. If a company is doing well, it has the luxury of time and can start with any of the cost saving levers. However, for a company caught in an urgent turnaround situation, they must use every available means to reduce costs in the shortest amount of time bearing in mind the savings limitations associated with each of these cost saving levers.

In both cases, more time and expertise will be required for strategic and structural cost improvements. This is where the company will benefit massively from the use of external experts working closely with internal resources to ensure such initiatives will be successful. The key is having the right expertise helping you.

Examples may include outsourcing or offshoring manufacturing operations to a lower cost country, outsourcing core functions, engaging in joint ventures for better scalability. Whatever the decision, once a certain savings target has been established and a certain route is decided, the leadership in the company must actively manage change.

2. Target low hanging fruits - These are the incremental savings that can be achieved in a very short time without any major impact on daily operations and customer service. They include focusing on G&A, renegotiating material prices and discretionary spending like cutting travel and training, etc. However, be careful not to lose sight of the larger size of prize in the strategic and structural cost improvement initiatives to be addressed. Remember the incremental savings will only yield a 5% to 10% savings level and you will need much more than this to achieve your goals.

3. Rising above operational silos - This is about rising above the operational silos of departmental/divisional responsibilities and discovering from the rolled-up picture the significant portion of total spend that should be addressed.

This is where our financial controller becomes our best friend to help us realize the opportunities spread right across manufacturing, supply chain, sales and marketing, etc. not just in G&A alone. In manufacturing for example, many companies who have successfully completed this exercise discover they should have outsourced or offshored earlier. You may also discover some core support functions like IT, payroll, etc. could be easily outsourced to achieve greater scalability.

4. Focus on both short and long-term goals - Having decided to focus on both short and long-term cost improvement goals, it is important to be able to classify and manage goals and objectives according to the level of complexity and time needed to complete them. This will help create progressive milestones, drive commitment through responsibilities and accountabilities, as well as manage expectations all around. Additionally, depending on the crisis state of the company, some of these longer term goals can be accelerated towards an earlier completion date by engaging additional internal resources and the right external expertise to see it through.

5. Adopting the right business model and cost structure - The foremost question is whether to adopt a centralized or decentralized business model. In general, a centralized business model is able to accomplish greater economies of scale and its corresponding savings. However, in high growth companies needing the freedom to innovate and drive business responsiveness, a decentralized business model may be essential.

The other important aspect to consider is the ‘cost structure’ of the company. Indeed manufacturing may need to take place in another part of the world like in Asia or China in order to compete with companies that are already operating there either to support their current and future Asian customer base or who are taking advantage of the low production costs and competing directly with you at your doorstep. Additionally, after taking into consideration cost of staff benefits, training, recruitment, skills availability, including interruptions due to leaves and attritions, some core functions may be better off outsourced for on-demand service and improved scalability.

6. Closely manage change - Experience tells us a major barrier to successful strategic and structural cost improvements comes from within the company. When there is a lack of stakeholder support arising from a poor understanding or suspicions about what the company leadership is trying to accomplish, especially for large scale cost structure changes like manufacturing outsourcing and offshoring, it may serve to frustrate the entire process.

Communication and involvement is critical to getting buy-in at all levels. The company leadership has to lead the charge throughout the entire duration of the project and be seen to be advocating such need for change for the benefit of the company and employees in the long run.

Sure, it may take a slightly longer time and effort on the part of senior management, but it will certainly save a lot more time trying to navigate resistance and possible sabotage downstream of the process.

The Leadership Imperative

Clearly as business leaders, we are compelled to set our sights much higher. We must strive for transformational excellence and get to the right solution as soon as possible no matter how painful or unpopular some of these decisions may seem. This is absolutely critical especially when facing a major economic downturn and there is really no further time to lose. The key is having the right expertise helping you.


In reality, we do not need an economic crisis to begin focusing our attention and resources on the important strategic and structural cost improvements for the company. It should be an ongoing exercise and as I’ve mentioned earlier, your global competitors are camping right at your doorstep. If you’ve not already done something about it, the time is here and now, whatever may be the size of your company or the industry that you are in. The company will also be much more robust in limiting damage caused by cyclical economic downturns and jobs will be generally safer all around.

N.Y. Ho has leadership responsbility for Corporate Vantage's business solutions group which specializes in helping businesses establish a solid and lean operating presence in Asia which includes Asian manufacturing outsourcing and offshoring, supply chain optimization, vendor quality management and business infrastructure development. He can be reached at .

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