Achieving Cost Leadership

7/28/2019 Achieving Cost Leadership

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Perspective Peter Bertone

Andrew Clark

Daniel West

Stuart Groves

Achieving CostLeadershipA Sustainable and

Pragmatic Approach


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Anna Burrage and Miles Puttergill also contributed to this article.

Booz & Company i a leading global management conulting

m, el te wol to buee, ovemet,

a oaato.

Ou foue, Ew Booz, ee te ofeo we eetable te t maaemet coult m 1914.

Toay, wt moe ta 3,300 eole 58 ofce aou te

wol, we b foet a kowlee, ee fuctoalexete, a a actcal aoac to bul caablte

a elve eal mact. We wok cloely wt ou clet

to ceate a elve eetal avatae.

Fo ou maaemet maaze strategy+business, vt

www.tatey-bue.com.

Vt www.booz.com to lea moe about Booz & Comay.

CONTACT INFORMATION

LondonPeter BertoneSenior Partner

[email protected]

Andrew ClarkPrincipal

[email protected]

Daniel WestPrincipal

[email protected]

Stuart GrovesSenior Associate

[email protected]


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AChiEVing

COsTLEAdErship

A Sustainable andPragmatic Approach

A lobal eceo fataoace, cot cotamet

etu to te to of te

maaeal aea. Maycomae ae ty but fal

to utaably cota te

cottypically due to anablty to talate ea to

actcal teveto ale to

te uely actvte be

te cot. We beleve, oweve,tat a mle, amatc aoac

ca el oazato avo te

may tfall of cot cotamet.

Cost Control: Back at theTop of the ManagerialAgendaTe wol eveloe ecoomeae ft to eceo;

coece low a cet

owee to be ee. Eve te bet ecoomc tme, o

buine conciouly intend to be

efcet, but wt eue o

te to le o tee, cot aeaa te cete of atteto. Moe

ta ot-tem efomace

at take. Lo-tem owtootute tll ext, a te

comae tat ae ealtet

u te owtu wll be bet

otoe to catalze o teebou. Tee comae ae

focu o cot cotol.

Te ee to maae cot

ot ew, yet a u

umbe of oazato tuleto uccefully cotol te

oeat exee ove tme.some tevetofo examle,

aco-te-boa e cuto a eoazatoca

yel ot-tem eult, but

toe beet ca be fcultto uta. Moe ytematc

aoace, o te ote a,

ca eeate eue lo-tem

oluto, but ofte u outof mometum u, o eve

befoe, mlemetato.

1Booz & Company


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2 Booz & Company

All too ofte, well-coceve cot-

cotamet oam fal ue toa ablty to talate ea to

actcal teveto ale to

te ouce of te cottat , te

uely actvte be tatcot. At te oot of t oblem

lay a umbe of commo tfall.

A amatc aoac ca eloazato avo te may

tfall of cot cotamet.

Crash Diet vs. Long-TermCost ControlUltmately, acto to maae

a comay cot bae wlloly be ucceful f te oot

caue of cot ae aee

ectly. no octo woulave a atet eek to loe

wet to mly to eatfo a coule of week. it oul

be o ue, teefoe, tatmla ca et ae aely

ucceful fo cooato. Jut

a a ealty et about watyou eat (ot oly about wat

you ot), utaable cot

maaemet about wat you

o a wat you e o t(ot oly about wat you ot

e). if oazato ae to

aceve ucceful, utaable

cot cotol, t motat to

coe te actvte a wat et o tem, ate ta

coe cot e e.

Containing cot need not becomlex o low to ay off. A

mle, amatc aotc

ofte all tat eque toetfy otetal ootute.

Oazato ca te ee

a tuctue oam of

teveto to catue quck wwle loe-tem oluto ae

ut to effect elewee. To be,

awe tee fou bac queto.

Question 1: What Activities CanWe Not Live Without?Eve te leaet oazato

mut efom ceta actvte ft to kee te lt o, o

to eak. Mmum taaae maate fo afety a

leal comlace, fo examle.

Muc of wat oazato o,oweve, volve a mlct

coce about wat a ow to

o t above a beyo uc

bac actvty. To utaablyae te actvty bae, t

tcto mut be mae exlct.

Question 2: Which Activities

Can We Simplify or Aggregate?

Jut becaue a actvty eceay oet mea t

alway efome efcetly.

pocee ca become excevely

comlcate ove tme a attemtto eace eco mak aw

eve moe takeole to te

oce. Alteatvely, mlaactvte ca become ulcate

aco fucto. suc tace

may be well kow yet emauaee becaue ca

tem woul be comlcate o

tme-coum.

Question 3: Where Can We

Redene Demand for Activities?

Eve f a actvty elveeefcetly, f t ot maae

caefully, cot ca al.

Comae fequetly tuleto ueta wy te oveall

cot comettvee oo

wle te eult of becmak

vual ocee tell temtat ut oce cot ae low.

Te total ema fo a actvty,

oweve, a a ctcal at tolay total cot. if buee o

ot ave ufcet claty o te

e-to-e mact of eco,

cot ca ow aly.

Question 4: What ActivitiesCould We Stop?Altou may actvte ae

ome way eceay to te

oo a ucceful oeatoof a oazato, may ae

cetoay. i ou exeece,toy lay a motat at

bot wat a ow t aeoe. Actvte tat at oe tme

mae ee commoly fal to

ta u to examato we teoazato ak, Wy o we

tll o tat?

By awe tee fou bacqueto, oazato ca take

te t te towa acev

utaable cot cotamet.

Five Common Pitfalls to Cost-Cutting Programs

1. Applying blanket cuts across the boardBlind cuts often do more harm than good, as both coreand non-core activities suffer.

2. Repeatedly tweaking the operating modelOrganization is one lever for changebut only one of many.

3. Looking only at what I do, but not what I spendTotal cost of activities is often poorly understood.

4. Balking at hard decisionsTough calls on cost tend to be avoided because of aninability to prioritize risk.

5. Failing to challenge budgetingBudget systems should not make it easy for managers tohide their spending or play the system.


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3Booz & Company

imlemetato ee o to

leae a a clea meto of

aoac uc eco.

Jut a a amatc aoac

oul be ue we etfy

ootute fo cotcotamet, a mla aoac

focue o uely actvty

eetal to uccefullyavat te eco-mak

oce. succeful otzato

of ootute ca ealybe aceve wt two mle

ctea: (1) te ctcalty of

a actvty, o t motace to

te bue; a (2) te eaeof mlemetato o ablty to

uece te ot tem. By

cateoz all actvte/caealo tee two meo,

eco make ca make a

objectve aemet of teeceay tae-off a ave a

tool to eeate buy- fo te

lae way fowa. We call t

aemet te a coeca.

Tey ca be to ueta

te uely actvty coce

tat ve te cot oto.suc a aotc allow tem to

tuly ueta te eee of

feeom tat tey ave mak

utaable cae elate to cot(a amle av beakow

ow Exbt 1). Te eult

coce, oweve, ae ot alwaymle o ale. it at t

ot tat may comae falte.

Tough Choices: Making theHardest Decisions Easierietfy otetal ootute

oe t, but e te betway fowa qute aote. Eve

wee ytematc evew allow

actvte to be callee, tee uually a eaoable aumet

fo o t te way tey

ae cuetly oe. it umaatue to efe te evl we kow

to te evl we ot. Teefoe,

oce ootute ae ete,

mak cot eco ca tllbe fcult o eve aful.

Te a coeca ove a

mle famewok to otze

a to ae ow ee to cut (eeExbt 2). Actvte tat ae le

ctcal a le calle to

to ae obvou lace to tat.

dee o te extet of teacal callee face, oe

mly wok outwa fom tee.

A te take bul u, te leca be aw weeve eco

make eem aoate, bae

o wat te oazato caealtcally affo.

A wt ootuty etcato,

clea, u-fot ueta ofactvte ctcal to ucce at

t ot. h-a tem te

to cota low-a ub-tem.Wtout ufcet aeato

of uc ou of actvty t

moble to ueta teootute to cut cot.

Getting It DoneEve wt te at fowa eceuo a ee, elvey eet

Exhibit 1Sample Savings Breakdown

Source: Booz & Company analysis

Simplify, standardize,

and automateprocessesCreate low-costservice centers (e.g.shared services)Outsourcetransactionalprocesses

Drive demand for service based

Total

overheadreduction

potential is

35-40%

on business affordabilityEstablish fit for purpose servicelevelsProvide transparent demand,pricing, and performancemeasurement of servicesCreate an ability for the businessto choose to stop using services(with real impact on costs)

Efficiency Complexity

Reduction

Lean Organization

Structures

Demand

Levers

Opportunity%

25%

14%

0

20

40

60

80

100

8%

43%

Supply Driven Demand Driven

Pricing

10%

Price/Buy

Client Example

Renegotiateoutsourcedcontracts

Rationalize duplicativefunctions across theorganizationImplement best practicesInstall a tailored servicedelivery model

De-layermanagement byclearly definingroles and decisionrights


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4 Booz & Company

a al callee. i ou exeece,te amatc aoac, aa,

wok bet. Few meto aveove moe effectve eu

elvey ta te mle exeet

of clea accoutablty a cleaautablty.

Ootute a te

eoblty fo elvetem oul be ee wt

eco, clealy evaluate, a

teate to buet to ve

lowe allowable e. Oomeauemet a eot of

oe te become ctcalfo eu ootute ae

ealze. Latly, oe oul

be cetely meaue to eueclea vblty of eac vual

teveto. T el evet

maaemet fom ubttut

ceae actvte wt oteactvte, a t eult a

clea evaluato of cytallze

ootute a av.

Conclusioni a cealy callebue evomet, cotmaaemet a aa come

to te foe. May comae

fal to eal wt t callee a utaable way. At fault

a lack of focu o a actcal

meto to ae te uely

actvte be cot. i teetme of ecoomc tumol, uc a

amatc aoac eque.

Exhibit 2The Pain Scorecard

Source: Booz & Company analysis

Criticality

Implementation Challenge

Low

High

Low High

Ranking 1 (Low) or 4 (High)

4

3

2

1

3 41 2

License to Operate Harm to people and/or environment Legal/regulatory constraints

Reputation impact

Criticality Criteria Pain Scorecard (Illustrative)

Degree of Implementation Challenge Single department and/or Less than 1 month to execute

Multi department and/or 1 to 3 months to execute

Group interaction needed and/or 3 to 6 months to execute

Committed expense and/or non-recourse contractual obligation

Business Support Process-Related Impact

Nonquantifable impact on Revenues Impact related to production/technical/

regulatory/governance/planning process

Quantifable Impact on Revenues Measurable impact on production levels

(e.g. boe/day)


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Achieving Cost Leadership