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Cost Management and Assigning Value May 30, 2011

Posted by Tim Rodgers in Management & leadership.
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Every organization will eventually face a financial crisis of some magnitude that causes everyone to scramble looking for ways to lower costs. Typically there’s a new target for expenses — for example a 10% reduction — and enlightened organizations may go so far as to grant managers authority to make whatever cuts they judge to be appropriate without sacrificing critical business commitments. Many organizations “guide” the cost cutting process by focusing on specific line items in the budget for significant reduction or elimination. Travel, employee training, consulting, and morale-building are often targets because their costs are highly visible and easy to control — just don’t spend the money — and the benefits of these activities are not immediately apparent. This is in contrast to other targets such as process efficiencies that may actually save more money but are harder to identify and implement.

I’ve been through many such cost cutting exercises over the years and I always used to feel frustrated by what I saw as short-term thinking. I’m not going to defend all travel, but even with all the communication technology available to us in the 21st century there’s still benefit in periodic face-to-face relationship building between colleagues, partners, customers and suppliers. Training is an investment in the knowledge and skills of the workforce. Consulting gets a bad rap, but when the objectives are clearly defined and the results are measurable the ROI to the organization can be tremendous. I think morale-building  activities are almost always under-valued in their contribution to employee productivity and retention.

What I’ve come to realize is that when it comes to budget line items the cost may be easy to measure, but — as with any service — the value is determined in large part by what people are willing to pay for it. The challenge for managers and leaders who want to re-direct the cost cutting effort to different targets is to figure out how to express value (not necessarily in monetary units) in terms that can be understood and appreciated. This may not change the ultimate outcome, but it enables a more rational comparison of cost cutting options.

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