In these times of austerity and financial prudence one of the biggest challenges facing the engineering manager is how to keep on top of costs. E&T reads an important new book on the subject'.
If you need down-to-earth, practical, even breezy advice on how to cut costs, based on the author's many years' experience with top consultants in Europe, America and Asia, I advise you to buy, beg or borrow 'Driving Down Cost' by Andrew Wileman.
This book is not just for those with top-line financial responsibility. It will open the eyes of most line managers and department heads too.
The author can claim four decades' experience and at least 50 big cost-reduction projects to his credit, for clients as diverse as private equity companies, consumer goods, retail, travel and transport organisations, financial services, software, IT and telecommunications businesses: global billion dollar businesses with thousands of staff, down to individual departments with 50 employees.
A project could take three to four months, with the client usually needing to get cost out quickly but without killing future growth potential.
'We set up working parties with management teams,' he recalls, 'do the analysis, identify cuts, and develop action programmes.'
You might think cutting costs is straightforward, but today's engineering managers spend up to half their time and brainpower on costs: how to stop them growing; where and by how much to cut; while avoiding cuts that can be dangerously deep. To drive down cost, the author advises, you need clear accountability and good reporting. 'When your management team is sitting round the table, you need to be able to attach specific cost targets to individual names in such a way that those individuals really control the outcome. And then there must be the possibility of tracking results in the same way.'
Where to cut?
The question is where to start driving down costs? One starting point might be a comprehensive look at all the professional and service or administrative costs bought in, which probably include: accounting, legal, property management, possibly HR and PR and marketing, or at least advertising, and outsourcing. Some internal departments responsible for buying these services will opt for premier or top quality suppliers: a practice known as the 'IBM syndrome'.
You can see why this happens: no CEO or CFO ever got fired for hiring McKinsey or Goldman Sachs. Similarly, companies wishing to impress their shareholders and bankers might choose to work with top firms of accountants and management consultants: names that look impressive inside the covers of annual reports and accounts. Recently there has been a trend to use smaller, less well-known firms, often breakaways from leading suppliers, and no less skilled.
Conversely there's a chance, Wileman warns, that some of the suppliers used by your firm have been there for a long time. Does anyone ever check what options are available - maybe brighter, less expensive young providers who ought to be tried and tested?
And make sure, he recommends, that the way services firms are paid gives them an incentive to save you money. Advertising agencies, for example, have to buy space on TV or in publications. Check that they are buying well. If you are buying a business, 'don't pay your investment bank a percentage of transaction value - agree a base fee plus a bonus depending on how cheap you can get it'.
Travel represents one of the biggest costs for many companies. Until a few years ago individual managers might have been to choose their own travel agent and company representatives made their own travel and hotel arrangements. Then companies woke up to the costs involved and appointed their own travel managers to oversee central buying and consolidate dozens of suppliers.
Marketing costs represent another tricky area. But where do you start cutting? Why not introduce a diktat that all promotional and advertising plans must be slashed by 20 per cent? Until you've tried it, how can you tell what effect this might have? Who checks that marketing expenditure generates a positive contribution to sales and profits?
The single most important tool for cost management is a good set of management accounts, says Wileman. 'Elegantly structured and crisply presented,' it should tell a complex story in a few concise lines. It should show an artist, the CFO, at the height of his or her powers. This is what management accounts should do:
- Show a rich story of what is happening with the business economics - history, today, future projects.
- Allow you to see what is going right and wrong and where you need to take action.
- Let you model outcomes under different scenarios.
- Track progress against plans in ways that reinforce lead manager accountability.
- Do all this in an accurate, insightful and efficient way.
'Driving down cost' has become the key to survival, which makes the updated edition of this book even more important than when it was first published in 2008. You can find able accountants and financial controllers, but not many have the experience or insight of Wileman who has done it for big, global businesses with billion-dollar cost bases and thousands of staff and for small individual departments with 50 staff. He's been CFO for two technology businesses, a software firm in Seattle and an off-shore IT business in India, besides experience with Booz Allen Hamilton in London and New York and with Boston Consulting Group in Boston while getting his Harvard MBA.
Cost management has so far been treated as an issue predominantly for CEOs. This book treats it seriously as an issue for management at all levels, with useful tool kits and case studies, realistic ideas, and refreshing candour, including ideas for the public sector where this book should be even more widely appreciated than in other sections of industry.
'Driving Down Cost: How to manage and cut costs - intelligently' By Andrew Wileman, is published by by Nicholas Brealey, £14.99