Strategic cost reduction

Knowing what to cut and why

As with all recessions and periods of economic contraction, the focus for many organisations is on cutting wasted spend as quickly as possible. But for many leadership teams, the challenge is knowing what to cut and why. What do we really mean by wasted spend and how do we measure it?

Cutting the wrong things could yield unintended consequences affecting growth or other strategically important outcomes. It is beneficial to focus resources on the projects and programmes that add the most value - but what do we prioritise? Do we prefer the continued implementation of strategy, or should we focus on short-term revenue or profitability?

Being able to determine which projects and programmes are driving the most effective future performance of the organisation can be challenging for organisations that haven't aligned execution on strategy before.

The problem of performance measures

Initiatives and projects can contribute both to KPIs and performance measures throughout the organisation, each of which can contribute to more strategic goals in a typical cascading OKR/performance hierarchy. But how can we make sense of this and know what the impact of cuts will be?

For some teams, this kind of analysis becomes so complicated, and the data on what is really adding value is missing, so cuts become little more than a gut-feel exercise of the leadership team behind closed doors. What can then follow is a series of cuts which bear little relationship to the immediate or long-term goals of the organisation - and an ensuing storm of objections that can take months to resolve.

Traditional methods for cost reduction

The traditional method of cutting takes two forms. Firstly, an initial pass through the portfolio to identify any discretionary projects that can be immediately cut or deferred. Once the discretionary projects have been removed, the next question is what else can we start cutting into?

Should we take a shallow cut across all areas of the business and ask all leadership members to remove a percentage from their portfolio (a "haircut" as it's commonly called)? Or should we identify major projects and programmes which, while contentious, allow us to drive deeper cuts in one part of the organisation?

The challenge with both methods is that regardless of which strategy you take, cutting inevitably leads to a strong reaction from internal stakeholders. To help alleviate this, the rationale for cutting should be clear and the links to the execution of the strategy should be transparent.

The strategically focused cutting method

When times get tough and markets are turbulent, it is important to remain strategically focused, adaptive, and open to opportunities that inevitably arise. I would recommend considering a different method to prioritise the simplification of the portfolio based on contribution to strategy:

1. Clarify and ratify objectives. Are your objectives still the same, or has the change in markets affected them?
2. Re-review performance measures in the light of changing markets and determine whether the performance expected needs to change.
3. Reassess the chosen strategy. The strategy is the choice that has been made of how to achieve objectives. Is this choice still valid given the economy and environment?
4. Reaffirm what the measures are that will show whether the strategy is successful.
5. If the choice would be different, go back and reassess whether a short-term change or a wholly different strategy is required.
6. Refocus on the initiatives that really drive the progress of the strategic choice in the short term.
7. Clarify within those initiatives the specific contributions of projects and programmes to performance measures.
8. Rank projects and programmes which are likely to drive the biggest performance against strategy based on their business case and contribution to performance measures.
9. Identify anything essential for compliance, ongoing operations, or continued customer delivery and excellence.
10. Anything else that doesn't fall into these categories becomes the hunting ground for cuts. Take a zero-based budgeting mindset and ask from first principles why each project is required.

This simple method ensures that you can continue to drive your strategy and that you have confidence in the portfolio's contribution to outcomes - enabling you to clearly articulate why certain projects and programmes will be cut or deferred, without contention.

The challenges of cutting large portfolios

While this framework is set out in a straightforward way, there is potential for significant complexity in real-world analysis. At planning time before any projects have started, it may be relatively easy to understand the expected return from their initiation documents. However, once projects are in progress and investments have already been committed, it can be more challenging to cut projects with deferred benefits.

One of the factors driving further complexity is the impact of dependencies between initiatives, programmes, and projects. Some dependencies may be known and can be factored into the analysis; however, some may not become clear until further analysis has been completed or projects are already running. Try to map dependencies as early in the process as possible to avoid this trap.

Strategy execution software

Many of the challenges of real-world cost reduction and simplification can be alleviated by strategy execution software which can account for the complexities at scale and know the impact on strategy. Effective strategy execution software can track both the execution and the impact of delivery (or failure) on outcomes - making the analysis faster and easier to understand, particularly as things change.

Once the link between strategy, performance, and execution is formed, making the case for cutting non-strategy contributing activities becomes easier, faster, and less contentious. As a result, it creates focus, consensus, and strategic agility - often seen as the holy grail for strategy execution success.