Why 48% Of Cost Reduction Initiatives Fail

Almost half of all cost reduction initiatives fail – and that’s despite enterprises scaling back their cost-cutting ambitions – as Deloitte’s 2013 Cost Improvement Survey reports:

“[Despite lower targets…] executive respondents have reported a higher failure rate for their cost initiatives. In 2008, the failure rate was 14%. In 2010, it was 37%. And in 2012, the failure rate climbed to 48%, meaning that nearly half of all cost initiatives now fail to achieve their goals.”

One root cause – possibly the root cause – must be that most organizations don’t have an enterprise process management platform. So they:

  • don’t have a comprehensive and joined-up perspective on their operations
  • don’t have a framework for effective collaboration on the design and implementation of change
  • can’t fully leverage the power of process visualization to simplify
  • can’t easily break down silos and engage their people in continuous improvement
  • are locked into project-thinking, and so down-playing longer-term sustainability.

It’s a diagnosis that’s borne out by the survey respondents:

“The biggest barriers to effective cost reduction cited by respondents are “lack of understanding” about the need for cost reduction (74%), and “erosion of savings” (73%) resulting from cost improvements that are not feasible or sustainable.

Survey respondents indicated that their companies are attempting to overcome the barriers by focusing more attention on change management (52%), clearly defining goals and objectives (41%), and communication (32%).”

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Sustainable Improvement: How To Make Cost Cuts Stick

McKinsey Quarterly - May 2010Further compelling evidence this week from McKinsey that sustainable business improvement is what really counts.

According to McKinsey: many cost-reduction programs are “illusory, short lived, and at times damaging to long-term value creation”.  Only 10% of cost reduction programs show sustained results three years later. Yes, you read that right: 90% of cost reduction programs fail.

Amongst McKinsey’s advice on best practice in cost accounting and data integrity, three things stand out for anyone looking to build a framework for sustainable performance improvement.

(1) ‘Seeing’ the Process

McKinsey reports a fundamental difference between Manufacturing costs and Sales, General and Administrative (SG&A) costs.  Manufacturing costs have fallen consistently over the past decade, whereas SG&A costs are unchanged. McKinsey suggests one reason why SG&A costs have proven so difficult to reduce: that ‘managers lack deep enough insight into their own operations’.

This diagnosis fits exactly with a case study from New Balance, which initially focussed its Lean program on manufacturing, with dramatic results in service, lead times and reduced costs.  But, away from the shop floor and looking at SG&A costs, it was far more difficult to achieve the same results with the same techniques.  It’s easy to see what’s happening on the production line and in the warehouse.  It’s far more difficult to figure what’s going on in the office. New Balance described Nimbus as allowing them ‘to see the process’ – after which their Lean program could deliver SG&A cost reductions.

(2) Local Engagement

McKinsey notes that: “Most cost innovation happens at a very small and practical level.”  Which is why any process management application must engage end users and the process stakeholders. The people who are closest to the process are best placed to see the cost reduction opportunities, and to assess the trade-offs.  Cost management must be an ongoing exercise, says McKinsey, part of the culture, not a one-off unsustainable initiative.

Some discomfort for the Six Sigma community because, for the same reason, McKinsey’s recommendation is that: “The process planners who run programs such as Six Sigma improvement efforts are generally the wrong choice to manage cost-cutting programs.”

(3) Understanding The Whole

The report stresses that cost reduction has to be seen in the round: Initiatives in one area of the business can often have unintended negative consequences elsewhere.  It quotes a global manufacturer where cost-cutting in manufacturing led to the loss of clients and market share because the the cost-cutting leaders were working in isolation from the sales and marketing teams.  They simply didn’t understand how customers used the products.

All in all, more solid evidence that sustainable performance improvement across the enterprise requires a complete, integrated and end-to-end view of the business processes, and in a language and format that enables enagement at every level.

© Text Michael Gammage 2013