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General algorithm for work to reduce costs

This algorithm is universal regardless of whether the cost reduction is carried out as a one-time project or as a regular process; the difference will be in the intricacies of performing individual procedures at each stage of the algorithm. As practice shows, the most problematic is to collect information about business processes, since all other information is more or less available, although not always relevant.

The general algorithm for reducing costs in the company is the following sequence of work:

setting (clarification) of the goals and objectives of the project;
diagnostics of costs and identification of promising directions for their reduction;
activity diagnostics (business processes, losses, organizational structure, personnel);
analysis of activities in promising areas of cost reduction;
the formation of a program of measures to reduce costs;
implementation (implementation) of a program of measures to reduce costs;
evaluation of implementation results and / or program adjustment.
This algorithm is universal regardless of whether the cost reduction is carried out as a one-time project or as a regular process; the difference will be in the intricacies of performing individual procedures at each stage of the algorithm. So, if the activity of cost management is regular, then the work on diagnosing the activity will obviously be carried out to a limited extent, since all the “pain points” in the activity are already known. Therefore, in the description of the algorithm, we will consider cost reduction as a project, since the procedures in this case will be more extensive and complex. Due to the volume and complexity of the whole topic, we will further consider the first three points of the proposed algorithm.

1. Setting (clarification) of the goals and objectives of the project

With the setting of goals, any business should begin. At the risk of seeming trivial, we recall the basic principle of setting goals for SMART. Objectives must meet the following criteria:

S – Specific. One goal is to reduce costs. Another goal is to increase cost-effectiveness. What are the costs? We can produce nothing at all, and direct production costs will be as low as possible. Is this good for the company?
M – Measurable. It is necessary to indicate what exactly is the criterion for achieving the goal. Say, do not reduce costs in general, but reduce them, say, by 20%.
A – Attainable. It is necessary to understand how it is planned to achieve the goal, and carry out a check: is it possible, in principle, to achieve the goal with the available means?
R – Relevant (relevance). It is necessary to determine whether our goal is adequate and whether the available funds correspond to it. Suppose we decide that we will improve the activity through its automation. In this case, it is necessary to make a forecast: will the automation costs exceed the potential resource savings?
T – Time-bound. It should be clearly indicated in what time frame we plan to achieve our goal.

Based on the practice of similar projects in Russian companies, the most common mistakes in setting goals are:

inadequacy of the goal and resources allocated for its implementation. You must understand that cost reduction is not free. In any case, we spend something, at least the labor costs of our staff on the implementation of certain measures to reduce costs;
excessively understated deadlines planned for the project. As a result, you have to do everything “on your knee”. The result of this is predictable: “We wanted the best, but it turned out as always”;
goal setting without analyzing the degree of its attainability. Since managers may not know all the specifics of the activity and not take into account the existing “pitfalls”, the goal may be set deliberately unrealizable in the current conditions. Incorrect settings of the goal belong to the same, for example: “To reduce the number of personnel by 10%,” that is, the size of each unit by 10%. But why is it necessary to cut staff without fail evenly? Perhaps some units can be completely eliminated, while some, on the contrary, can be strengthened by personnel. As a result, the number of personnel in the enterprise as a whole will decrease, but the rest will work more efficiently.
At the goal setting stage, when we still do not know exactly the specific measures by which we have to reduce costs, it is difficult to assess the attainability of the goal. Nevertheless, it is worth at least inviting experts who will help with a qualitative assessment of attainability in the current conditions. It is also worth predicting the financial model of the enterprise in an environment where costs are already reduced. This will allow a qualitative assessment of the possible results of the project.

2. Diagnostics of costs and identification of promising areas for their reduction

Diagnostics of costs is that it is necessary:

collect and structure data from the management accounting system and / or budgeting system about the costs of the company;
correlate costs and objects of activity – business processes, units, personnel.

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