Mitch Max introduces a series on cost consciousness in business organizations. He reveals differences in cost consciousness and the need for a good consistent culture.
In episode 20
Coming up on this episode of Performance Management Edge… We explore our cost consciousness.
I’m Alan Stratton and this is the show that helps you get an edge in business. This is the edge you need to get things done, to soar above the masses, and to make more money.
Cost. What comes to mind when you hear this word? To some, their image is that of the accounting department telling them they can’t do something because it isn’t in the budget. For others, they imagine a heavy burden that they have to carry around all the time. Yet for others, cost is simply a way to measure and monitor what they’re doing. The images that come to mind define our current cost consciousness.
To some, cost is a dirty word. They’d rather not discuss it. To others, profit is something the big bad corporations steal from their customers. It is a fact that we must spend money to make money. It is also a fact that without profits, a business will shrink and die. Costs and profits are simply measures of real work and results. The real question is how to truly manage costs in a sustainable way in an organization and how to make profits required to sustain and to grow the business.
In this episode, Mitch Max begins a series in which he will help us explore, understand, and improve our cost consciousness.
Over to you – Mitch.
Frequently on this site, we have discussions around technical issues relating to cost implementation. While these are important, I find that many organizations struggle with the basic philosophical issue of how to focus their organization on effectively managing expenses.
So I want to begin a new series of discussions on the basics of profitability management by exploring why expense management is so difficult for many companies, and what we, as finance professionals, can do to make it a more successful effort.
The roots of the problem are often in the way we think about creating accountability for and managing costs. Let’s begin by going back to our childhood, or perhaps to the way we raise our own children. One of my clearest memories (perhaps foretelling my accounting training) was being given a weekly allowance. There are three types of children – those who spend it all, those who save some for another time, and those who exceed the spending and borrow from future weeks. For most of us, we would tend to spend most of it – either because we had the need to spend it or because we needed to demonstrate that it was a necessary amount – after all, part of the fall “back to school” ritual was the annual renegotiation process around the weekly allowance – something that I’m now on the other side of as a parent. First we dealt with inflationary increases – such as an increase in the cost of bus tickets or the cafeteria lunch. Then we moved on to increases in discretionary amounts such as movies, and finally we considered funding for new types of expenses that had not been required before, such as school dances.
Is it any wonder, then, that most approach management of their own company funds in the same way? We begin with the annual budget negotiations, and then proceed to carefully spend up to the authorized amount. Budget reductions are not something to be handled lightly, and spending is based on what’s left in the bank.
When you run a small business, you have – or should have – a solid outlook on your own cash flow, projected revenues and necessary expenses. Since profits fall to our own pocket, we spend what is needed at the rate required. We can do this because:
- We are vested in the success of our business and
- We have good visibility on current and future revenues and expenses.
As our business grows, we try and instill this same sense of ownership in our staff, and try to stay connected to the business even though we may be more removed from the day-to-day activities. Clearly we don’t try and use the allowance method for ourselves – but often we begin to employ it with our staff. The most successful companies succeed by transferring values into the regular decision processes used in the field by their staff.
From the Performance Management perspective, the key to successfully running a big business is to run it like a small business.
How can you successfully motivate all members of your team to manage expenses using values when many of them are used to operating in an allowance rule-based approach? This is not a technical problem, rather it requires tackling on a more basic level.
In my experience, the key is to develop an approach that builds Cost Consciousness into our organizational decision model. Cost Consciousness is a term that was described by Bjarte Bogsnes from Statoil in Norway. At Statoil, management has successfully positioned their business to evolve from cost-cutting to one where employees in the field are empowered to make the right decisions about the levels of expense needed for the business. It removes a focus on budget-based entitlement spending in favour of an approach that relies on informed decisions by empowered staff. This requires two key elements:
First, a strong set of cost analytics, so that data is presented transparently and clearly for all to see, understand and use.
Second, is the corporate culture, characterized by trust, that enables staff to make those decisions with confidence.
How can you bring Cost Consciousness to your company? I’m going to examine this in more detail in coming episodes, here on Performance Management Edge. We’ll review the types of reporting needed to create a cost conscious environment. Then, we’ll look at how to create a supportive cultural environment by integrating this information into regular decision-making processes. You’ll get some practical advice to help you become more Cost Conscious. See you soon.
Thank you Mitch for helping us understand our cost consciousness.
Let us hear your opinions. Mitch and I would love to hear your experience and comments on your company’s cost consciousness. What works for you? Scroll down the page at Performance Management Edge dot com and let us hear your opinion.
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