Matt Lehman explains why 75% of corporate cost-cutting initiatives fail. A BCG survey found cost is a top priority for 35% of leaders, yet most programs fall short. Lehman identifies four drivers of cost creep: unclear accountability, overhead creating more overhead, hiring instead of redeploying staff, and failing to capture savings from automation. A global healthcare company generated over $1 billion in gross savings in year one by addressing all four.
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Welcome to The Procurist Podcast, where we dive deep into the world of procurement management. I'm your host, Brittany Jones, and today we're tackling a topic that's on every CEO's mind: cost management. Joining us is Matt, a seasoned consultant with years of experience in helping companies streamline their operations. Matt Lehman, thanks for being here with us today.
Thanks for having me, Brittany. It's great to be here and discuss such a crucial topic for businesses today.
So, Matt, let's jump right in. A recent survey by Boston Consulting Group revealed some pretty sobering results about cost management programs. Can you give us a quick overview of what they found?
Absolutely, Brittany. The survey, which included nearly 2,100 business leaders worldwide, showed that cost is the top organizational priority for about 35% of respondents. However, and this is the kicker, 3/4 of these leaders said their cost programs didn't hit their goals. It's a pretty stark reality check, isn't it?
Certainly is, Matt. And what's even more concerning is that many companies seem to be stuck in a cycle of launching these programs repeatedly. Why do you think that is?
Well, Brittany, it's often because these cost initiatives are looking at superficial measures without addressing the underlying organizational causes. It's like, um, treating the symptoms rather than the disease. You know, companies need to change behaviors and organizational dynamics to really make a lasting impact.
That makes sense. So, what are some of these underlying causes? The survey mentioned 4 evergreen cost drivers. Can you walk us through those?
Sure thing. The first one is that leaders often don't have sufficient performance accountability for their P&L. About 80% of senior leaders cited this as a driver of cost creep. Essentially, many leaders have their own objectives and a persistent desire for resources, but they don't see absolute cost as their problem.
Interesting. So, how can companies address this issue?
Well, it's crucial to assign clear P&L accountability, including both profit and cost reduction goals, to business leaders. This often requires redesigning the operating model and creating strong incentives for leaders to secure absolute savings.
Got it. What's the second cost driver?
The second one is that overhead tends to generate more overhead. About 74% of both senior leaders and middle managers observe this in their organizations. Companies often address emerging issues by creating new committees, processes, and managers, which leads to more costs and complexity.
Sounds like a vicious cycle. How can companies break out of it?
To break this cycle, companies need to aggressively cut bureaucracy, overhead, and low-value work. This might involve shrinking support functions, increasing managers' spans of control, and eliminating unnecessary work processes.
Alright, what about the third cost driver?
The third driver is that companies tend to hire more people rather than redeploy existing resources and talent to new priorities. About 79% of top leaders identified this issue in their company. When a new opportunity arises, the instinct is often to create new roles rather than transferring or repurposing existing positions.
That's interesting. It seems like it would be more efficient to reallocate existing resources. Why don't more companies do this?
Well, Brittany, it's often because the organizational model isn't built for flexible resource pivoting. Plus, leaders sometimes benefit from empire-building, so it's not in their interest to cooperate in resource transfers. To address this, companies need to revamp their operating model and governance processes to make it easier to shift resources to higher-priority areas.
See, and what's the 4th and final cost driver?
The last one is that companies struggle to capture the promised savings from productivity investments. About 76% of senior leaders reported this issue. Organizations invest in productivity solutions like AI and automation, but often the gains don't materialize and translate to a leaner organization.
That's surprising. You'd think that investing in productivity would naturally lead to cost savings. Why doesn't it?
Well, the problem is that after labor productivity increases, leaders often don't follow through and eliminate superfluous positions. Instead, they use those freed-up man-hours on other priorities. To address this, companies need to develop concrete plans to capture hard savings and redesign processes and roles to incorporate new technology.
This is all fascinating, Matt. It seems like addressing these 4 drivers could really make a difference in a company's cost management efforts. Do you have any examples of companies that have successfully tackled these issues?
Absolutely, Brittany. The article mentions a global healthcare company that launched an ambitious program to reduce costs and reallocate resources. They addressed all 4 of these cost drivers and managed to deliver more than $1 billion in gross cost savings in the first year, with 25% of that being reallocated into growth areas.
Wow, that's impressive! Can you give us a quick rundown of what they did?
Sure thing. They enhanced P&L accountability, moved resources away from centralized functions, cut resources in legacy product businesses, redeployed existing talent to staff new teams, and rigorously reviewed every position to ensure savings would be secured. The result was not just cost savings but a more efficient, agile, and responsive organization.
That's a great example, Matt. As we wrap up, what would you say is the key takeaway for companies looking to improve their cost management?
The key takeaway, Brittany, is that successful cost management isn't just about what you change, but how you change it. Companies need to address these 4 drivers we've discussed and focus on altering underlying behaviors and processes. This approach can lead to sustainable cost reductions and give companies a lasting advantage over their competition.
Excellent insights, Matt. Thank you so much for sharing your expertise with us today. To our listeners, Thanks for tuning in to The Procurist. Remember, effective cost management is about more than just cutting expenses. It's about creating a lean, agile organization that's built for long-term success. Until next time, this is Brittany signing off.
