Lesson in Cost Management from a CFO & a highlighter

This week I came across an article from BCG that brought back a seminal learning experience for me. The article, and my experience, was about the importance of managing costs.

My Learning Experience

source: www.clickamericana.com

Early in my career in HR, in what seemed a random occurrence at the time, I was walking past the office of the CFO and he called me in to look at a spreadsheet that had just come off his personal dot-matrix printer. He said, ‘how do you think we are performing right now?’

Now, I’d just been at a Sales meeting the day before where they were high-fiving revenue up by 5% and gross margin by 7%, so I said, ‘things are going pretty well, sales and margins are up’.

‘Yeah, well let me show you something’ he said, as he took a highlighter and passed it through a couple of lines on the sheet. ‘Look at this’ he said, ‘People costs are up by 8% due to increased headcount and wage rises, and people costs are our third highest cost.

Here’s a tip. Whenever a cost increase number is higher than a revenue or margin number, that’s a Red Flag. If it’s a blip fine, but if this is a trend we have a problem, because if you think I’m going to cut our profit target to save people, think again. We will cut people to save the profit. My advice, look into it now.’

There was nothing nasty in his tone, just a tremendous sense of commercial pragmatism. And his tip stuck with me through the rest of my time in HR. Which brings us to today and the BCG article.

Even before the time of dot-matrix printers, a focus on cost has been a key factor of organisational performance. And it will always be one. The lesson here is that every leader needs to think strategically about cost, to align their people behind it and weave it into the culture of the organisation.

Strategic Cost Management

Cost focus isn’t just confined to big functions like Manufacturing, Supply Chain, Logistics, and Procurement and Product Portfolio Managers. It’s a collective effort that involves every function within the company, including my old area, HR.

Cost reduction and containment should underpin or complement strategic initiatives on growth and revenue management / cash flow strategies. It is the responsibility of each business unit and functional leader to align their programs to either support growth or reduce cost.

I’m no finance whiz, so over time I’ve found it useful to look at programs and activities through three filters.

Maximise, Optimise, Minimise:

• Optimise: Essential but not strategic programs and activities must be simple and run efficiently so they don’t hinder growth or inflate costs.
• Maximise: When programs or activities directly support growth and revenue or drive down costs, these should be leveraged to their fullest potential.
• Minimise: When there isn’t a direct link to growth or cost, these programs and activities should be pared back to a minimum viable product that prevents unnecessary costs, while staying within any and all legal and/or ethical boundaries.

Ultimately, cost management thinking, disciplined execution and aligning values and culture is a shared responsibility that should permeate every part of the organisation, unlocking the resources to drive sustainable growth and financial health.

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Justin Miles

Manager Partner, Melbourne at Generator Talent

Justin is the Managing Partner of our Melbourne office, an outcome focused leader with a track record of driving business performance through proven talent and organisation development practices. Justin’s methods and skills have been shaped by working with performance oriented leaders in great companies including PepsiCo, The Campbell Soup Company, Diageo, Rip Curl, Fonterra and Wesfarmers, in Australia, the USA and Latin America.