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Cost Control to Drive Financial Performance
Discover the role of cost control in improving financial performance.
What does cost control look like in action? How have managers felt about their key roles here (ie managing behaviour and evaluating performance)?
Consider a dramatic example, the global financial crisis of 2007–2009. According to a survey done by McKinsey in 2009, 79% of all companies cut costs in response to the global financial crisis. Interestingly, however, only 53% of the executives thought that doing so has helped their companies weather it. [1]
“The [global] financial crisis and the Great Recession posed the most significant macroeconomic challenges for the United States in a half-century, leaving behind high unemployment and below target inflation and calling for highly accommodative monetary policies.” – Jerome Powell, US Federal Chairman. [2]
What accounts for the disconnect between the behaviour of the majority of businesses (i.e. implementing radical cost controls during a crisis) and managers’ perceptions of the effectiveness of those actions? While there are many ways to address this question, and many more cognitive biases to mind along the way, the gap between actions necessarily taken and managers’ perceptions of the effectiveness of those actions can come down to a lack of awareness about how cost-cutting strategies align (or don’t) with the company’s larger strategy.
Aligning Cost Control with Strategy
In order to align cost-cutting strategies to the company strategy, managers can consider the following actions:
- restructure to reflect future value
- reconsider the core business structure and focus (eg acquire businesses, expand into new geographies, engage in joint ventures, or vertically integrate the business)
- rethink organisational design (eg relationships among the corporate centre and the business units)
- resolve unfinished business decisions (eg incomplete merger integration)
- remove non-value-adding cost layers, functions, processes, or activities
- increase managers’ span of controls
- apply lean techniques to repeatable or low-value activities
- consolidate activities to gain scope, scale and knowledge
- provide role clarity to create relevant accountability
- implement high productivity standards
- identify where the organisation is presently weak (eg due to a complex organisational design or people are not in the right places)
- determine where the stronger capabilities exist (eg in IT, finance, sales-specific activities, etc).
By considering these actions with the goal of aligning cost control measures to company strategy, managers can more confidently implement and appraise necessary cost-cutting actions.
Now, let’s consider two different examples where companies have implemented, or have announced, cost-cutting measures. Keep the above points in mind as you read about these two real-world examples, and be prepared to discuss how their actions relate to their respective business strategies.
1. Banking Industry – HSBC
The 2020 COVID-19 pandemic caused a wave of restructuring and cost control announcements across various industries, but HSBC Bank was one of the earliest to make a move. In mid-February, HSBC announced that, as a part of an effort to cut costs by $3.5bn, it will cease up to 35 000 jobs leading into 2022. In addition, HSBC plans to reduce its assets by more than $100bn by the end of 2022.
“I think they [HSBC] were too optimistic about their chances of their success in investment banking. The reality is that the biggest investment market in the world is the US, and if you’re not big in the US in investment banking it’s pretty tough to succeed in that business – and they’re not.” – Peter Hahn, banking expert and former dean of the London Institute of Banking & Finance, on HSBC’s announcement [3]
2. Technology Industry – Slack
By outsourcing its logo creation, website design, web and mobile applications, the popular communication platform Slack raised an impressive $250m investment for a total valuation of $5bn in 2017.
“We were there from the start. Understanding the value of design, [Stewart Butterfield, Slack co-founder] and his team came to us when Slack was a rough unstyled prototype and asked us to help make it great. We worked with him to build the app from the ground up—along with the brand, the mobile app, the marketing site—the works.” – MetaLab [4]
By partnering with MetaLab, an interface design firm, the Slack team was able to receive valuable feedback, improve their offering, and then launch a tool that reached 15 000 users within just two weeks. In May 2018, the number of Slack users worldwide surpassed 8 million with large companies like IBM, BBC, and Oracle utilising Slack in their daily activities.
Consider this…
To what extent did the actions HSBC and Slack take align with their respective strategies? Which cost management techniques have you encountered? Why might an organisation pick one method over another?
References
- A better way to cut costs [Internet]. McKinsey; Oct, 2009. Available from: https://www.mckinsey.com/business-functions/organization/our-insights/a-better-way-to-cut-costs
- Low Interest Rates and the Financial System [Internet]. Federal Reserve Board; Jan 2017. Available from: https://www.federalreserve.gov/newsevents/speech/powell20170107a.htm
- HSBC signals mass job cuts as profits plunge [Internet]. BBC; 2020 Feb 18. Available from: https://www.bbc.com/news/business-51499776
- Slack: MetaLab product design case study [Internet]. MetaLab. Available from: https://www.metalab.co/projects/slack
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Financial Analysis for Business Performance: Data-Driven Decision Making
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Financial Analysis for Business Performance: Data-Driven Decision Making
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