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COST CUTTINGSTRATEGIES
The global financial crisis has made cost management the biggest priority for most organizations.
However, decisions to cut costs can be made too quickly and end up destabilizing the business in the long
term, making it unable to meet strategic objectives. The organizations that get it right are those that try to
strike a balance between having a competitive cost structure, implementing an effective strategy and
investing in the future.
Research on previous recessions show that the organizations that came out strongest had not hacked away
at the typical targets for expense reduction such as travel, training, marketing and across-the-board,
arbitrary headcount reductions. They made sure they understood the strategic impact and sustainability of
cost-optimizing actions. The result was an organization well-positioned to achieve high performance.
To achieve this balance, an organization needs an effective cost management framework that enables it to:
 Carry out a comprehensive analysis of their cost structure and an understanding of what drives their
costs;
 Streamlining business processes and create efficiencies as far as possible without impacting on core
objectives;
 Understand the impact of a reduction in headcount on productivity;
 Prioritize the opportunities to cut costs;
 Understand which costs drive performance and which do not;
 Ensure cost optimization initiatives are in line with short-, medium- and long-term strategic goals;
and
 Communicate new strategies and cost reduction initiatives across the organization.
A long period of sustained growth has allowed poor cost management habits to creep in, with few
organizations having a clear view of what drives cost. This lack of visibility hampers the ability to take
quick, decisive action to reduce the right costs. Cost optimization is not achieved by arbitrary cuts across
the board, with little or no consideration to the potential impact on current or future performance. This
method can often have negative impacts of poor productivity and a decline in stakeholder satisfaction that
can lead to a death spiral.
When business is strong, we sometimes forget about being prudent, but we all remember the "bad days"
of the recession. We don't want to be scrambling to "do something" if we are in a cash crunch. If we are
doing okay, why not cut some costs and put more money into the organization’s pockets? Companies are
justifiably anxious to reduce costs. But the problem with cost cutting iniatives is that they are put into
practice without considering their sustainability. Often, cost savings achieved in short term eventually
leaks away and the initiatives wind up damaging corporate infrastructure and culture.
Why do most cost reduction iniatives fail:
 Lack of in-depth understanding of the cost baseline thereby having difficulty in identifying and
tracking cost reduction opportunities;
 Repeatedly focussing on low hanging fruit and administration activities thereby failing to address
baseline operating costs where opportunities exist;
 Failing to address spend culture and how the spend is tracked; and
 Inability to monitor results.

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A CASE STUDY FOR COMPANY X – A COST CUTTING STRATEGY
OBJECTIVE
The main theme behind this cost cutting initiative is to give Management a tool which is able to assist in
saving costs thereby adding strength to the cash flow without impeding the achievement of core
objectives.
ANALYSIS BASED ON FINANCIAL AND PERFORMANCE INFORMATION OF COMPANY X
1. Revenue Background
 Overall revenue (consisting of different revenue components) for Company X has decreased by 40%
from 2014 to 2015 of which the key contributing revenue stream decreased by 30%;
 Within the key contributing revenue stream, certain key sub-revenue streams decreased on average
by more than 20%; and
 Other operating income also saw a decline of 35% on average.
Possible Strategies and Initiatives
 Perhaps the revenue model should be relooked at with the aim of either trying to maximize the
opportunity of creating other revenue streams considering changes in buying behaviour or relooking
at the current revenue streams and identifying and correcting inefficiencies as the current revenue
model does not seem to be working as intended considering the sharp decrease in overall revenue;
 Processes within new business development should be reassessed so as to further enhance and
improve its effectiveness;
 Other operating income, especially those that decreased drastically, should be further analysed and
root causes for its decrease assessed, evaluated and remedied.
By implementing some or all of the initiatives, overall financial sustainability can be further improved
and operational pressures minimized.
2. Expenditure Background
 Certain administrative expenses had sharp increases without any valid reasoning. On average these
expenditure items increased by 17%.
 Staff costs were the other big factor impacting expenditure increases totalling to a 20% increase
without any further additions to the staff complement.
 Another significant expenditure increase was Legal Fees. This percentage increase was 100%.
Possible Strategies and Initiatives
 Noncore or non essential expenditure should be reduced with key focus on discretionary expenditure
in lieu of creating savings. Focussing on the root causes of costs will assist in determining whether it
is warranted;
 Assess all payroll related costs with the aim of identifying discretionary ones which can possibly be
further trimmed to create savings.
 As a measurement to ensure sustainability of cost cutting measures, the possibility of relooking at the
budgeting process should be considered and making management accountable for their expenditure
spend.
 The financial plan should be consistently challenged to identify opportunities for further cost savings.

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3. Performance
 After scrutinizing the key strategic outcomes; it can be noted that for both 2014 and 2015 financial
years, certain outcomes were over achieved in terms of targets set while others were under achieved.
Cognisance should be taken of the fact the overachievement of outcomes require resources whether it
be financial, human or time. By not striking the balance between agreed upon targets and actual
achievement of the outcomes suggest that resources may not be optimally used and may negatively
impact the limited resources.
Possible Strategies and Initiatives
 Analyzing spend data by linking operational plans to financial plans (performance information to
financial information) to understand the cost structure of the organization and what drives these
costs. With this understanding one is able to accurately identify the cost structures and take measures
to create efficiencies;
 Build monitoring indicators to understand productivity, efficiency and cost measures on a quarterly
basis and take action when warranted; and
 Consider measures to assist with finding the right balance between the underachievement and
overachievement of targets. This will assist with resource optimization in the short to medium term.
Effective budgeting and alignment of both financial and nonfinancial information will assist
tremendously.
4. Human Resources
 Staff analysis suggest a decline in productivity; and
 A further review of the organogram suggests that the human resource component may not be
optimally utilized.
Further analysis should however be performed to identify the root causes of these situations.
Possible Strategies and Initiatives
 Understand the functional activities and identify whether noncore activities are taking up too much
time thereby impacting on core outputs.
 Review the organizational structure with a view to reducing duplication of functions as well as the
appropriateness and effectiveness of administrative, core and technology functions.
Wayne Poggenpoel
Wayne is currently at the Human Science Research Council (HSRC) within the Enterprise Risk Management Unit as the Compliance and
Business Analysis Manager. His current responsibilities include regulatory compliance for the entire organization as well providing various
business intelligence information in pursue of company strategy. Prior to the amalgamation of the Africa Institute of SA (AISA) and HSRC,
Wayne headed up the internal audit function of AISA, responsible for all internal audit related responsibilities.
Wayne has Master’s Degree in Internal Audit coupled with a National and National Higher Diploma in Internal Auditing as well as with
international certifications in internal audit, control self-assessments and government auditing (CIA, CCSA, CGAP). He has in excess of 17 years
internal audit, risk management and management consulting experience which crosses both private and public sectors. He is a current member of
the Technical Committee of the IIASA as well as a Member of an Audit Committee Cluster of Gauteng Treasury responsible for the Departments
of Agriculture, Human Settlements, Infrastructure and Development, Roads and Transport and Cooperative Governance and Traditional Affairs.
Wayne has presented on various topics including internal audit at several conferences and forums and have written articles for different
magazines including the IIA Advisor.