Raising your Cost Consciousness

Recently, I had the pleasure of joining a number of professional friends and colleagues at the 2012 Beyond Budgeting Annual “Let it Roll” Conference in Houston. In this and future postings, I want to reflect on some of the key ideas and discussions over these 3 days.

Bjarte Bogsnes from Statoil presented one of their key concepts as shifting their company from a cost-cutting approach, to one characterized by “cost consciousness”. There are two key concepts in play here: First, providing sufficiently strong cost analytics such that managers can make effective decisions about the “right” level of cost to support the business. Second, and perhaps more important, is executive discipline to trust managers to manage costs appropriately as they see fit.

I see these two elements as firmly inter-linked and inter-dependent. Organizations cannot make good decisions on cost when they only understand the level of total cost by department or manage by accounts. Effective management requires a deeper understanding of the work activities performed by employees in pursuit of business goals. It requires the ability to measure a select number of performance metrics, including ones based on cost, productivity and effectiveness. It requires the tools to identify, visualize, understand and communicate both the causes and impact of costs. It requires the discipline and ability to consistently make what one presenter characterized as data-driven decisions. Finally, it is enriched when coupled with the ability to simulate changes in cost based on changing levels of business volumes or various cost-improvement actions.

When these capabilities are linked with an understanding of corporate goals and objectives, the freedom to act, and the ability to run their area as if it was their own business, managers prove able to make those data-driven decisions and achieve cost goals without resorting to mandated cost cuts.

In fact, a recurring theme across the Beyond Budgeting presenters was the ability to manage costs without resorting to employee terminations in almost all cases – even during recessionary periods. Strong measures with a forward-looking approach enable effective managers to make the right decisions that guide the organizations’ health during both good and bad times.