Sustainable Savings: The Difference Between ‘Spending Less’ and ‘Costing Less’

Achieving sustainable savings is an inherent part of staying competitive, providing clients with more value, being more effective and achieving operational efficiency. It is something that comes with the role of ‘managing’ something.

Achieving savings does not necessarily have anything to do with a strategy of being the low-cost option. For those that try to manage their processes optimally, achieving savings is a measure of efficiency. This could be done to maintain a specific level of service, to keep providing value to customers with more profitability, to provide more value or services at the same cost or to react to a competitor that is trying to compete by lowering prices. Nowadays with competition at hyper-velocity, it’s just the way most organizations live, looking to achieve better cost positioning – regardless of your value proposition and pricing.

Best Return on Resources

Independently of what industry or activity you are in, whether it is a company, a government institution or a non-governmental organization (NGO), the truth is that what is important is not only to know how much things really cost (a basic management task that many organizations have resolved, but that constitutes an aspiration for many others) but also how to obtain the best return on their resources – how to cost less.

The achievement of this fundamental concept is no trivial task: “costing less” is frequently confused with “spending less” and this error inevitable brings to the situation widely known as ‘bouncing effect’.

This phenomena, of which I am sure you have been heard at least once, and maybe even experimented yourself, consists in ‘tightening the belt’ to get to the required end of the year budget, goals and numbers, doing enormous sacrifices in people, organizational erosion and planned expenses, just to realize one or two years down the road that those expenses are at the same level or maybe even higher.

This occurs because acting in this way companies are eliminating the expense, not the fundamental reason that originated the need for the expense. Therefore, these organizations end up ‘rebalancing’ themselves and spending what they need to function properly.

Thousands of organizations of every industry suffer the ‘bouncing effect’ every “X” number of years, when trying to obtain savings through ‘containing the expense’, a practice that finally destroys value, affects the morale and organizational culture of the company and ultimately erodes the organization and their leaders.

I must clarify at this point that I do not mean to say that ‘tightening the belt’ and not spending expenses and investments already planned in the budget is not a valid strategy to react to an unforeseen need or event, or to a foreseen crisis in the future. What needs to be understood is that these tactics, by themselves, are not the right way to obtain savings that will sustain over time.

‘Containing the expense’ could very well be a very effective short-term method to quickly react against a pressing need, but needs to be accompanied by fundamental measures that affect why things cost what they cost. The ‘root of cost’ must be attacked, and solving it will lower the cost because the processes, products, and services would require less (time, supplies, materials, and other resources) and thus would ‘cost less’.

Understanding Why

Independently of what your industry may be, the elusive sustainable savings pass through three basic stages.

1. Understanding why things cost what they cost and identifying where the tactical opportunities for short-term savings are, as well as the medium and long-term ones to spend and cost less respectively.
2. Obtaining the tactical short term savings trying to affect the business dynamic as little as possible. And at the same time, accelerate the decisions that will aid the structural changes that will make things ‘cost less’ (less work, less time, fewer resources and supplies).
3. Perform the fundamental changes and sustain the new way of doing things until this new way ‘fixes’ in the organizational fiber of the company, making it a habit and therefore allowing things to ‘cost less’ naturally.

In our Management Consulting and Business Enablement practice we support our clients with a 3-step methodology:

• Find the Savings: Utilizing Activity-Based Management techniques, we help the client to better understand the costs, the fundamental causes that generate them, the relationships between the support processes and the ‘core business’, and to identify the tactical and strategic opportunities the company has. The deliverable of this phase is an Opportunities Portfolio with different options for the Client to decide the best way towards Sustainable Savings.
• Seize the Opportunities: We accompany the client in the process of making the tactical and strategic changes that have been defined in the cost reduction plan, and we support the management of change during its execution. During this time, we provide guidance and assistance to the client to make the fundamental changes in processes, culture and if necessary, organizational structure to align the organization to a new, ‘less costly’ way of achieving the same or better results. Industry 4.0 has brought tremendous capabilities to produce sustainable savings, through automation, better information and the power of the Internet of Things (IoT), today we can do stuff that 5 years ago required enormous resources and effort. Sustainable change is just around the corner… literally.
• Keep the Savings: As the changes from the plan go into effect, we work alongside with the Client to establish the control and management systems that will keep the savings achieved. In some cases, this means co-working with the Client’s personnel until they reach traction and autonomy. For example, we have sometimes provided the role of Cost Controllership on demand, where we support the control
  of costs and the acquisition of new behaviors until the organization ‘fixes’ the new spending habits into its culture.

This same approach in cost reduction is applicable to other situations and contexts, for example where the achievement of eco-efficiencies and environmental sustainability are critical. Combining this approach with others that eliminate waste, for example, Lean Green Methodology, process management best practices along with the environmental sustainability guidelines of the EPA (Environmental Protection Agency), and use the principles of carbon accounting to measure the impact in ‘green savings’, can produce green sustainable cost reductions and carbon footprint reduction.