10.12.08

Strategic Cost Management
A Long Term Approach to Cost Control
By Mark Orlosky, COO Alinga Consulting

The growing pressures of global competition and technological innovation have made cost management much more critical than ever before. Most businesses understand the importance of controlling costs, especially at times when a cloud of uncertainty penetrates the market or during times when cash is tight.

We are now often reading about companies in Russia taking steps to reduce costs due to falling sales, past due accounts, or because the credit they once relied on has dried up. However, in Russia controlling costs has always been especially important, as rents and legal compliance costs there are disproportionately high and labor productivity fairly low, to take two examples. Perhaps because profits have long been surprisingly high, these organizational challenges – and the advantages of properly facing them – have generally been underestimated.

When Troika Dialog, for instance, announced layoffs for 8% of its staff, most agreed that it was directly due to the crisis – a market contraction had limited the amount of work to be done and the money to pay for it. However, when X5, Russia's largest food retailer, announced layoffs of 30% of its management force, most commented that the seemingly drastic move was actually long overdue. The need for it had previously been masked by high profits and easy credit and so the company had allowed itself to grow and stay "top heavy."

Strategic cost management should not be a one-time event to save a business from a particular crisis. Rather, as a permanent strategy, it allows the company to save resources through efficiency and to concentrate on gaining market share and retaining customers. The best run companies make cost control part of their overall business strategy to provide maximum value to the customer at the lowest possible cost, or in other words, to make the company maximally competitive within its market. This is also the best method, of course, of ensuring that your business can survive a market downturn.

Strategic Cost Management For Your Business

Strategic cost management requires that managers think both long- and short-term. It requires organizations have an accurate and detailed budget that can be rethought, in most cases, line by line, in order to achieve specific long-term goals for the company. This may seem difficult to implement for most organizations. The expenditures for large corporations are often very complex. Small and midsized organizations may feel they don't have the resources to provide the analysis and implementation needed.  However, this can be overcome.

The first step is to set goals. Where do you want your company to be in a year? In five? Ten? Knowing where you want your company to realistic go in terms of revenues or market share can be a great first step to showing you how to get there. Even if a company is already number one, it should never take that position for granted; efficiency is the best way to stay there.
Once you have goals in place, there are several budget line items that are worth looking at more closely and frequently than others in Russia. By researching what the market has to offer in terms of providers, packages, and products, there can be considerable cost savings in these areas.

A. Internet – Internet fees in Russia are much higher than other countries due to the lack of competition and, in many cases, to business centers locking in with one provider. Most ISPs in Russia offer plans for businesses that are based on traffic instead of flat fees, and flat fees are often only for traffic up to a certain level. This means two things for businesses. First, it is imperative to have a clear and strong policy for employee use of the Internet while at work and to carefully monitor that usage on a monthly basis. Employees often don't realize that business Internet plans are far more expensive than home Internet plans and that the music they are downloading for free is costing the company more than the music itself is actually worth. Second, it is important to monitor your overall usage a few times a year and compare it to your plan (and other available plans) to make sure you have the most economical package. Also, keep in mind that one of the upsides of a market downturn is that providers will have to find better ways to compete for business. Talk to your service provider and shop around. If your provider can’t offer better rates, consider switching to someone that can.

 

B. Mobile phones and land lines – If your business relies heavily on telephones, especially for international sales, consider alternatives such as VOIP technology to lower costs. If VOIP is not an option due to start-up costs or availability, consider talking with different providers. Russia has higher than average calling rates, which should hopefully decline if competition begins to increase.  Often, you will have to ask your provider if a more competitive plan is available.

 

C. Office Supplies - If you are regularly purchasing a service or a particular item from a particular vendor, why not compare that vendor to others at least once a year? It is not surprising to see one company charging much less for the same item in a given market. For simple items like office supplies, it probably makes sense to choose the lowest cost provider in your area. For other items, you may need to consider other factors besides cost (such as quality and delivery service, etc). Also, consider buying in bulk from places like Metro Cash and Carry that offer deeper discounts. If you have a bit of extra space for storage, the savings can be substantial. 

 

D. Office rent – In Russia, rent is surprisingly high in nearly all major cities. Rent often comprises the largest single expense besides salaries. It is important for organizations to maximize their workspace, while considering future growth plans. The choice of location should be driven by your customer base, the types of talent you need to attract, and, most importantly, by the ability of your business to pay. Businesses who will constantly host clients for meetings at the office will want a convenient, central location near a metro. Those that will not may want to economize on the added expense such a location entails while keeping in mind that keeping and retaining talent also requires a convenient location that is easy for employees to get to. Do research on what others are paying in your market and be prepared to negotiate –  while also being fully aware of your rights and obligations as a renter. One good source of information on current rates, besides friends and business partners, is www.irn.ru. They post average rates per square meter.  If needed, hire an outside consulting company to help find and negotiate a good deal. The time and effort you save may be worth it.

 

E. Salaries – The market in Russia over the past few years has made it difficult to set salary levels for new and existing employees. Not long ago, it was not uncommon to see salaries for some positions double or triple in a one year. Now, it seems that salaries in Russia may finally be stabilizing due to the current market downturn. Use this opportunity to research and set salaries for incoming positions to market levels. Have a strong policy that employees should not discuss their salary with anyone to avoid conflicts with the discrepancies that a fluctuating market and long-term employees may create in your salary budget. Review salary levels yearly and try to pay competitive wages based on market conditions. Also, always consider expanding or altering current positions rather than creating new positions. Employees who feel they are growing in your company will be more likely to stay there – and the raise needed to entice an employee you already know is a good worker to take on more responsibility will almost always be lower than the cost of taking on a new employee. 

Strategic cost management should be an everyday, constant approach to businesses. It should not be a short term program implemented only to deal with a crisis. It should be geared for growth and efficiency so that a business will be strong enough to face crises or competitors as they arise. Look at your daily activities and try to keep costs in line with your long term goals while looking to consistently provide better value to the customer. Russia is an expensive market in which to do business, but there is still an abundance of opportunities, especially for companies that effectively manage the challenges with strategic cost management.

Read More about Accounting Services from Alinga Consulting Group