Financial captains face the pressure of having to manage costs while also improving business performance. Unpredictable changes and increasing competition often call for survival skills critical to the firm’s success, among which is cost management.
Although cost management denotes the need to plan and control the financial lifecycle of the firm, and while it may sometimes even involve cost reduction, this is not its only purpose. Cost management can also be functional in strategically advancing the position of an organisation in the market.
According to Srinivasan Rajagopal, Financial Controller, United Iron and Steel Company, strategic cost management can be instrumental in increasing revenues, improving productivity and boosting customer satisfaction.
“Aside from all of these, it can also be important in giving the company a competitive stand in the market as it is considered one of the success drivers of an organisation’s growth,” says Rajagopal. “It assists finance leaders in getting a clear view of the current and future cost structure of the business. Doing so makes it an important tool for the C-suite, as this can guide them in planning, communicating, and realising business strategies.”
Strategic cost management can also assist businesses in identifying practical approaches to benchmarking initiatives, total quality management, and continuous improvement, among others.
Muhammad Faisal, General Manager, Finance and Procurement, Al Mostajed Group of Companies, shares this viewpoint, reiterating the strategic value of cost management. “While its most conventional focus is, ‘which products/functions are most profitable?’ its strategic approach aims to answer, ‘Which combinations of cost drivers and different types of business functions can produce the greatest overall contribution to profits?’” explains Faisal.
By implementing a strategic cost management programme, businesses can control their costs and at the same time maximise value creation within the firm. However, while it can be beneficial to all areas of the business, its role may still vary depending on the company’s business nature and strategy.
Faisal highlights that strategic cost management’s implementation is most critical in key areas like production, supply chain management and project management.
“When planning to deploy a strategic cost management programme,” says Faisal. “The finance leader should also ensure that the management team is on board and that they understand the role they will play in its implementation. The absence of support from key personnel within the organisation may result to reluctance or lack of cooperation in progressing the programme.”
“Aside from this, an effective strategic cost management programme should also consider integrating information systems to streamline processes and workflow,” adds Faisal. “Finance heads should have effective cross-functional teams with proper training to implement and use the systems, and a collaboration between the finance and operational teams is warranted for seamless execution of the whole process.”
A number of types of business intelligence software tools are also available and helpful in its deployment, however, these are not an imperative.
Rajagopal explains that identifying sources for revenues, which activities needs to be reduced or sustained, and what aspects of the business can increase effectiveness within the organisation, are also of critical importance when planning the programme.
“We need to be more pragmatic to ascertain the cost drivers in planning an effective strategic cost management programme. Cost drivers must reflect the activities they measure, therefore, we should ensure their accuracy,” says Rajagopal.
“The finance leader in charge of the programme’s implementation should also be able to identify inter-functional complexity within the firm, strategies that can lower costs, and whether the employees involved are skilled and knowledgeable enough to implement the plan and systems it entails,” he adds.
Further reiterating the importance of top management support, Faisal shares that employing the latest strategic cost management plans, techniques and relevant controls with the help of all stakeholders will only guarantee the smooth flow of the programme’s execution.
“As an example, within our organisation we have developed proper cost control mechanisms by M2M focus throughout the value chain in order to complete the projects in the most economical and efficient manner. In order to achieve this target, concepts of Total Quality Management and Business Process Reengineering play an important role throughout the organisation. These are all being done as part of our continuous efforts with top management,” explains Faisal.
Once a firm grasps the importance of strategic cost management, achieving its objective – reducing costs while strengthening the firm’s strategic position – is just within reach.
“Embracing strategic cost management is instrumental in the transformation of the finance and accounting functions of an organisation into business partners rather than being mere bookkeepers,” says Rajagopal. “This can also identify the true link between costs and revenues.”
To achieve meaningful results, strategic cost management requires a broad management support and commitment, emphasises Rajagopal. “Finance leaders should identify opportunities and be well-equipped with the knowledge of assessing them from a cross-functional point of view. They should also stay proactive and have an integrative mind-set.”
Echoing this notion, Faisal also stresses that the successful implementation of the programme also requires dedication from the finance leader and his team.
There are a number of ways businesses can improve productivity, while investing in initiatives to streamline business growth is an ideal way of moving forward, it doesn’t always necessarily result in profitable bottom line. Thus, while attending to the top-line advances, finance leaders should also remember to engage in a systematic approach to governing costs to ensure long-term value creation.