The current crisis situation has made it a priority for companies to be clear about which activities we carry out add or subtract, boost or weigh on our income statement. But in order to know what costs each of our activities has, it is necessary to first have a system in place that allows us to know the returns for each of the company's activities.
We must not forget that any restructuring plan based on sales has a 10% probability of success while one based on costs will succeed in 80% of the cases. The costs are in our power to control them and the sales are yet to come.
Problems of cost systems
But why don't most companies have this reliable cost system? In the first place, due to the prejudices (preconceptions, stereotypes) that all companies have.
The real difficulty of correctly allocating costs leads to doing so without an objective basis and the cost system is not a useful tool for decision-making.
The difficulty in obtaining the data or the lack of clear criteria for allocating cost items means that we have found multiple typologies when obtaining product costs, establishing the pricing policy or making more or less strategic decisions..
An example of this bad practice is the 'indices' used: the PSA ("just in case") or MdC ("Buffer Margin"), are clear examples of the deficiency assumed in the cost calculation.
Another very common mistake in calculating costs and returns is to assume that all costs are generated internally and that external agents have nothing to do with it. The costs derived from the different types of clients are rarely differentiated. Manufacturing batches, business expenses, promotional costs, etc. are direct customer costs that must be charged to the account. (see figure 1).
Figure 1
Undoubtedly, the path that companies should follow is to rethink each of their costs, see which ones are weighing down the company, and therefore do without them, and detect which ones allow us to be more competitive.
Methodology to be followed to reduce costs
The decisions that we have to make at the present time are defined by a single adjective: complex. Cutting costs doesn't mean cutting back on courier, meal, or photocopying costs. The approach must be strategic. You have to review the cost model from top to bottom. Cutting certain a priori more superfluous expenses (social benefits of executives, etc.) can cause the opposite effect: that the valid and necessary people of the organization end up going to other companies.
It has been shown that in 85% of the cases analyzed, the structural costs, derived from strategic positioning, were the ones that weighed down on the company. From that level, you should go towards more specific expenses and perhaps also reach minors.
It's time to make painful decisions (close business units that have been the flag for years, get rid of quasi-personal projects, do without loyal customers for 20 years…), and stop sleeping for a month. The tool that will facilitate this decision making is a cost system with the appropriate approach and going step by step considering where the value contribution really is in each area of the company.
1.- Strategic Restructuring
First of all, we must conceive that our organization is like a puzzle in which all the pieces fit together. Well, each part of that puzzle is each business unit. Now, it is time to rethink the profitability of each part. At that juncture, we must seek answers to the questions: who feeds us and who makes us waste? Are there expendable business units? (see figure 2).
If we have been able to answer these questions, the next step will be to raise the strategic viability of each business unit. There we will see which business units are viable in the coming months and it will be time to dispense with those that are not viable in the medium term.
In the same way, we will see what contribution each client and product makes to my costs and profitability. It is also time to consider what financial needs each business unit has and if we can provide it.
Finally, we will carefully study which business units it is interesting for us to get out of.
It is these types of decisions that will make us position our company in a profitability of an order of magnitude or another.
- What is a Strategic Dimension or Business Unit? Who feeds us? Who makes us waste? What real synergies exist between each business unit? Which ones are expendable?
- Strategic viability of each business unit (cows and confirmed promises) Contribution Margin Analysis Synergic Analysis (Products, Clients) Analysis of financial needs. Analysis of the financial needs of each business unit. Study of divestment.
2.-Restructuring Key Processes
Once I have successfully undertaken the strategic restructuring of my business, it is time to analyze which activities that I carry out in my business add value to me, that is, they are the key factors of my success. The objective is to optimize the processes that add value to me and what does not, I will have to do without it or outsource it. Similarly, I must see if I am being efficient in my processes and what resources I assign to each one.
It is at this time when the need arises to establish management by objectives at all levels of the company. Because what is not measured is not managed. The concept of efficiency is applicable to all areas of the company. All areas are susceptible to measurement and improvement. Even in the commercial area, where there is usually little methodology and a lot of "art", we must make efforts to implement methodologies that improve commercial efficiency. As an example, we can see the case of figure 4, where the sales force was restructured, and the number of sales representatives of a certain company was reduced with the same result.
- What are the key processes of my Business? Do we spend enough time on these processes? Am I being efficient in my processes? Are the allocated resources productive?
How do we do it ?
- Identification of key processes: They improve my margin in the short term.
- Analysis of productivity and saturation of resources Analysis of Margin improvements Customer / Products à Price policies Materials à Purchase, Flow,…
Figure 4
In the same way, we must study in which other items of the business it would be interesting to save, as well as analyze which expenses are absolutely necessary and which are not. It is time to take a pencil and paper and point out which of those expenses are superfluous and which are absolutely necessary. Our experience in negotiating at the general expense level indicates that a thorough analysis of each expense item can lead to savings of between 10 and 19% (see figure 5). Rentals (savings of up to 45%), insurance (savings of 10%), telephony (savings of 5%), information or advertising systems (a return analysis must be done), may be some items to play.
- What other items of expenses in my business can I save without being impaired? Which expenses are absolutely necessary and which are not? Are the support processes really optimized?
How do we do it ?
- Identification of the support processes: They are not Keys to my activity. Outsourcing study (logistics, payroll management, cleaning,…) Establish Pareto of expenses and savings objectives by items.
Conclusions
It is time to reflect, but above all to act. Focus on what you know how to do, but be careful! What we know how to do is not what we like the most or where the company comes from, what we know how to do is what the market recognizes us, what makes us earn money. Therefore it is very important that we leave the preconceived ideas and that we analyze exhaustively where we win and where we have the bloodletting. From that moment on we only have the "easiest" thing left: execute, execute, execute…
By applying each and every one of the parameters seen with an appropriate methodology, we can achieve a cost reduction that ensures viability in the short term and we are sure to have a much more solid position in the long term.
