How to Present Cost Control Information (#257)
/In this podcast episode, we discuss how to present cost control information to management. Key points made are noted below.
How to Select Costs for Reduction
Reporting on cost control means presenting an argument to cut expenses. My general rule on presenting any argument is that you should spend 25 percent of your time compiling the information, and 75 percent figuring out how to make a persuasive case. So, let’s say that you’ve identified a way to control costs. In fact, let’s say that you’ve identified several dozen ways to do so. Which is quite likely. There can be cost control opportunities all over the business. Your first step is to sort through them all to see which ones should be presented – which implies that not all cost control activities are a good idea.
For example, consider the company culture. It may have been designed to foster employee interaction, maybe through offering a beer bash on Friday afternoons, or expensive bonuses for the goofiest ideas to make fun of the company president. Sure, these could be cost reduction opportunities, but they’re also an essential part of the underlying structure of the business. If you suggest that these costs should be cut, you’re going to look like a clueless idiot who’s out of touch with the rest of the organization.
As another example, consider the company strategy. It’s quite possible that management wants to spend lots more money in areas where it wants to expand the business. From the perspective of the accountant, this could look like a profligate use of funds, but from the perspective of management, these are necessary expenditures. For example, the commission rate on new sales might be doubled for a new sales territory, because there’s a push to expand into new geographic areas, and management wants to give the sales staff an incentive to sell in these new areas. The doubled commission rate might look crazy from a cost control perspective, but it’s perfectly rational from a strategic perspective.
As yet another example, consider production capacity. The production manager might be keeping a number of old machines lying around unused, and it just bugs you that this equipment could be sold off right now to generate some cash.
But from the perspective of the production manager, those old machines could be brought back into use if sales exceed production capacity – which makes perfect sense, especially if those additional sales would otherwise be lost.
Based on these examples, you can see that presenting cost control information to management first requires a fair degree of knowledge about how the business operates and how it intends to compete – which may mean that you don’t report anything for a while, until you’ve built up some background information about the business.
Consideration of How Suggestions Are Received
And then it’s time to think about how your suggestions will be received. Most managers have protected areas that they don’t want to go after, as well as areas that they’re more than happy to cut back on. Maybe they want to deliver a hefty expense reduction to announce at the next shareholder meeting. Or, maybe it’s time to shave back those bastards in the marketing department. And, maybe they have a built-in aversion to certain types of expense cuts, such as doing layoffs. The way to learn about these tendencies is to spend some time getting to know the person who’s going to receive your recommendations.
This could mean having lunch with them on a regular basis, or attending the same meetings, or pretty much anything that allows the manager to chat in a general way about what he wants to do, and how he views the company. With this information in hand, you can tailor your recommendations to the manager. By doing so, what you recommend is much more likely to be implemented, because the manager is seeing cost management proposals that he inherently wants to implement.
Building a Case for Cost Reduction
Now, making recommendations in this manner also means that you’re leaving out all kinds of perfectly good cost reduction suggestions. That’s because you need to take a more circuitous path with those other ideas to gain acceptance. For example, let’s say that there’s a clear problem with a new product that also just happens to be a manager’s pet project. He doesn’t believe that it can possibly fail, even though you have solid information that it is. How to proceed? It depends on how the manager reacts to having a core belief jumped on. In a lot of cases, he will shoot the messenger, and since you’re the messenger, this can be painful.
There’re a couple of ways to deal with the situation. One is to gradually build a case over a period of time. During one meeting, you could mention that you’re going to evaluate all product sales, and in the next meeting, present a report that shows sales for all products, which just happens to include his favorite product. When he complains that the sales figures must be wrong, come back with a detailed sales analysis, and regretfully point out that the numbers are correct. The intent here is to engage in a gradual let-down, so that the manager gets used to an idea that he might reject if you just hit him with it all at once. Call it managing your manager.
Of course, this approach takes time, and if the expense situation is getting out of hand, you can’t afford to wait. If so, another option is to present several cost control suggestions, and mix it in with the other items. Then walk the manager through every item on the list in a fair amount of detail. By doing so, the manager will be so buried in information that he’s less likely to react negatively to that one specific issue. But, be aware that this approach doesn’t focus the attention of the manager on that one specific issue, so there’s a risk that you have to keep bringing it up.
Focusing Attention on Proposed Cost Reductions
No matter how you choose to make a cost control suggestion, it’s critical to only bring up a few at a time – maybe just one or two. That focuses the manager’s attention on thoroughly implementing those specific suggestions. It also means that you can spend more time developing additional information to back up your position, so that the case for implementation is overwhelming.
After the implementation is complete, you can dole out one or two more suggestions, and so on. It might seem like this approach is painfully slow, but the rate of successful implementation is actually higher than if you had dumped a massive 20-point list on the manager’s desk. In the latter case, the manager would have probably just picked a couple of items from the list and ignored everything else.