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Operating at high levels of effectiveness, efficiency, and agility are essential to success in today’s fast-moving, rapidly changing, highly completive business environment. Cost optimization is a key component of efficiency.
Also see my post “Efficiency vs. Cost Cutting: They are not the same thing, and the distinction is crucial!” to glean deeper insight into the concepts of effectiveness vs. efficiency vs. cost cutting vs. cost optimization.
In my companion post to this post - “Cost Optimization: Three Essential Strategies” I discuss three essential cost optimization strategies - Eliminate, Automate and Delegate. While not a prerequisite, reading the “Cost Optimization: Three Essential Strategies” post will provide the reader with additional context for this post.
Regardless of the cost optimization strategies and associated tactics that you and your team choose to apply, below are 10 essential cost optimization best practices applicable to any cost optimization initiative.
- Designate Cost Optimization as a Strategic Objective
An organization’s strategic planning process results in strategic objectives aligned with the organization’s forward-facing vision. Strategic objectives are communicated and cascaded to division/business units for execution at appropriate levels of the organization.
Designating cost optimization as a strategic objective helps ensure that you’re your cost optimization initiative receives sufficient mindshare, visibility, and urgency at the leadership level and then through to operational management – which is where changes/improvements are identified, operationalized, and implemented.
If cost optimization is not a strategic objective it becomes just another “thing” that operational management needs to balance in terms of budget, time, talent and focus with many other competing “things” - and the likelihood of cost optimization being carried out in an aggressive focused manner, particularly from a cross enterprise perspective, is low.
In any given strategic planning cycle, there are many potential strategic objectives and perhaps cost optimization does not make the cut in a particular planning cycle. No problem. It’s my experience that when the time is right, someone in leadership will connect with the concept of cost optimization and advocate for (and own) cost optimization as a strategic objective. - Ensure a Common Understanding of Cost Optimization
Business concepts, such as cost optimization are often ambiguous and lack clear consistent meaning across the organization. The concept of “Agile” is a great example. Agile means different things to different people across an organization.
It’s essential that everyone that is part of a cost optimization initiative have a clear, common, consistent understanding of the concept of cost optimization and associated cost optimization concepts such as effectiveness, efficiency, and strategic and tactical cost reduction.
To add to the confusion there is a range of industry standard definitions of cost optimization. Conceptually they are all pretty much equivalent. A commonly referred to / accepted definition, put forth by the Gartner Group is: “Cost optimization is a business-focused, continuous discipline to drive spending and cost reduction, while maximizing business value.”
The important takeaway from that definition is that cost optimization is not indiscriminate cost cutting, it’s about getting maximum/optimal value from the investment in cost optimization opportunities. - Perform Cost Optimization from a Cross-Enterprise Business Process Perspective
Cost optimization can be performed on a stand-alone basis or, perhaps as part of a Business Process Reengineering (BPR) initiative. Regardless, it’s essential to analyze cost and identify opportunities to optimize cost from a cross enterprise business process perspective.
There are 3 key reasons for performing cost optimization from a cross enterprise business process perspective:
Mitigates Process Sub-Optimization
Sub-optimization refers to optimizing a business process component (work activities, procedures, and/or workflows) within a functional silo (department, work team, etc.) in such a way that the optimization of the component within the silo negatively impacts (diminishes the effectiveness and/or efficiency) of the end-to-end business process across the enterprise.
The components of an end-to-end business process are interconnected - changes in a component in one part of the process could have unforeseen negative impacts on components of the processes that are performed in other functional areas.
For example, the reduction in cost in one functional area could result in an increase in errors/defects that are discovered downstream in the process in another functional area.
Accordingly, any cost optimization opportunity needs to be evaluated across the process end-to-end to validate that the opportunity is indeed cost optimization - not indiscriminate cost reduction within a functional silo.
Mitigates Process Cumulative Error
Cumulative error refers to the impact of the propagation of errors and defects through a business process. Simply stated, as an error or defect propagates through a process linearly, the cost of remediating the error or defect grows exponentially.
Or, as I like to say regarding business systems requirements – the best time to identify and correctly specify a business systems requirement is during business systems analysis. A very bad time to discover that you missed a requirement or identified the requirement but “got it wrong” is when the systems “goes live” in production.
The same type of thinking applies to cost optimization. The best time to identify and properly analyze a cost optimization opportunity is during the analysis phase of a cost optimization initiative.
However, getting the analysis “wrong” in terms of cost-to-value leads to sub-optimal selection of opportunities from the opportunity backlog. The concept of an opportunity backlog is discussed in more detail in Best Practice #5: Approach Cost Optimization from an Agile Mindset
Promotes Process Harmonization
Process harmonization refers to the standardization of multiple instances of the same business processes within an organization.
For example, an organization could have a customer billing team in Atlanta that serves the East, Southeast and Southwest regions of the organization and another customer billing team in Phoenix that serves the Midwest, Mountain, and West Coast regions.
From a Business Process Reengineering (BPR) perspective the objective is to ensure that the Atlanta billing team and the Phoenix billing team are performing customer billing consistently between the two teams.
Also, from a BPR perspective we would also want to analyze the potential to consolidate and centralize the two teams. An important component of the decision to centralize vs. remain decentralized is the cost-to-value of each option.
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