Rapid and Sustained Cost Management for Industrial Manufacturing

Driving value in uncertain times

In the midst of global demand shocks, sparse credit and an uncertain, interdependent global economy, industrial manufacturing companies are feeling the pressures of the economic downturn.
No one knows how long the turmoil will last. Avenues for growth are limited. The margin for error is near zero. Companies that want to surviveand thrive must act now to remain ahead of their competitors. Winning companies understand that the future is largely determined by todays actions. Accentures High Performance Business research and extensive experience shows that high-performance businesses invest to strengthen their position through mergers and acquisitions, product innovation and market expansioneven in a downturn. They support their efforts by strategically reducing costs to create cash flow. Rather than make arbitrary cost reductions, these winners adopt cost-management strategies that are aligned with company strategy and whose broader impact is well understood. In uncertain times, Accenture believes that implementing Rapid and Sustained Cost Management should be a priority. For industrial manufacturers, the impact of the weak economy and frozen credit markets has dramatically exacerbated the imperative to focus on rapid cost takeout in the immediate term as companies struggle with rapidly declining demand and mounting inventories, making it increasingly difficult to invest for growth to stay in line with top performers. Rapid and Sustained Cost Management is a comprehensive approach that improves cost efficiency, reduces the cost base and creates a culture of business financial ownership by creating visibility to a companys cost structure. The approach is innovative in that it enables companies to gain clear insight into who spends how much and on what by looking beyond the balance sheet to identify hidden opportunities to reduce costs to increase cash on hand and improve working capital. Rapid and Sustained Cost Management can provide a competitive edge in todays challenging economy by enabling companies to reinvest funds in ways to allow companies to emerge stronger than their competition when economic conditions ultimately improve. In short, it is one of the levers that can help organizations on their journeys to high performance.

Rapid and Sustained Cost Management

The current economic upheaval has made an immediate and significant impact on many industrial manufacturers. Emerging markets were the source of hope for sales; however, those markets are now faltering as the economic woes span the globe. Industrial manufacturing companies must look to implement aggressive, comprehensive cost-reduction and management strategies as revenue projections continue to become bleaker. How does our company operate today and how do we leverage our capabilities? How do we rapidly take out costs without inhibiting our ability to pursue growth opportunities? How do we improve efficiency, margins and cash flow while maintaining customer service

Rapid and Sustained Cost Management principles: Strong understanding of nature of cost and drivers Standardized definitions and policies Internal and external benchmarking Shared responsibilities between budget holders and category owners Cost ownership
levels? These are some of the questions that are top of mind with manufacturing executives today. All too often, companies cut the wrong costs for short-term gain, when instead reductions should be based on data and analytical evidence that keeps the companys sustained success uppermost on the cost-control agenda. Taking a strategic approach to cost management is key. Accentures Rapid and Sustained Cost Management approach focuses on achieving two main objectives: Combining cost transparency with shared responsibility Rapid and Sustained Cost Management targets all operational expenses (OPEX) and focuses on managing, controlling and reducing costs by creating visibility and developing a sense of ownership and discipline within the organization. The strategy to gain transparency involves allocating costs into a matrix structure between business functions, such as finance and sales, and costs categories such as travel and fees, according to standard definitions set by the organization undertaking Rapid and Sustained Cost Management. Cost category owners are given responsibility for expenditures throughout the organization; they create policies as standard rules for budgeting and spending, and challenge budget holders to optimize their budgets. The continuous challenge through shared responsibility drives savings opportunities. Establishing a sustained costreduction approach that enables organizations to channel cash to drive growth Detailed budgets are analyzed by the cost category owners who check adherence to the policies and run analytical models developed together with Accenture for a companies unique needs both on price and consumption cost drivers in order to identify detailed savings opportunities. For example, telephone expenses can be optimized by negotiating with suppliers on the cost per minute (price) and by challenging the consumption and diversifying the means of communication (consumption). Focusing on shared responsibility and nailing the drivers behind costs in this way enables actual spend to be accurately tracked against plan. The budgeting process acquires unprecedented clarity on costs that results in a significant savings figure. Rapid and Sustained Cost Management creates value by generating incremental cash. Based on organization priorities, this cash can then be used to solidify existing positions and fund new directions. Through Rapid and Sustained Cost Management, an organization can become leaner and simpler its vision and road map sharper. The companys investment risk profile can also improve, making it more attractive to lenders and shareholders.

Figure: 1. Rapid and Sustained Cost Management is implemented in a process of seven steps

Quick Win

Budgeting

Monitoring

Diagnostic

Visibility

Top-Down Savings, Policies & Targets

Bottom-Up Budgeting

Analysis

Negotiation

Monitoring

Assess companys current context (e.g., organization structure, chart of accounts, systems) prior to the implementation

Create a consistent mapping of the costs into a matrix of cost categories and business functions according to standardized definitions in order to have a clear insight in who spends how much and on what

Proceed to an initial opportunity identification to identify costs savings opportunities, define policies for all cost categories and set top-down targets per cost

Create bottom-up budget by business function starting from a zero base, while adhering to strict policies and according to the cost category split

Analyze the bottom-up budget by checking adherence to guidelines/policies, benchmarking and running analytical models both on price and consumption cost drivers in order to identify detailed savings opportunities

Organize sessions with the cost category owners and budget holders to negotiate the detailed savings opportunities and agree on the final budget

Ensure target achievement by tracking variances between the budget figures and the actuals on a monthly basis and setting up action plans

Budget Actuals 100 90 95 70 85 84

Implementing Rapid and Sustained Cost Management

To implement a Rapid and Sustained Cost Management initiative, an organizations existing processes are reviewed from beginning to end to identify cost drivers and optimize the value from the costs incurred. Rapid and Sustained Cost Management also assesses the impacts, risks and sustainability of potential costreduction actions, and identifies those that make strategic sense and that can be executed. Rapid and Sustained Cost Management initiatives varyfrom attacking excessive consumption and rationalizing roles to reducing wage and procurement

rates, working capital improvements, eliminating cross-functional redundancies and optimizing the cost-value relationship. Implementation plans are based on multiple factors: probability of success, timing of benefits, ease of implementation and the potential for margin and cash flow improvement, to name a few. They must also make sense strategically. Taking a process-driven approach to identify the costs is the key to success. Cost-reduction and working capital initiatives that drive operating advantage are intended to confront current cost and cash flow pressures. This approach enables a company to reduce the costs that often hide in redundant activities, manual hand-offs and rework that

occur between functions. Key processes that are considered are lead-to-cash (sales operations), procure-to-pay (procurement to accounts payable), hire-to-retire (all the processes that treat the employee as a customer of the business) and plan-to-manage (strategic planning to budgeting to managing the performance of the business). Other potential initiatives that can drive high performance for the business are product portfolio rationalization, span of control optimization, global resource and site location rationalization and marketing spend optimization.

Figure . Performance Comparison Following the 1990 - 1991 Recession Winners Pull Away After Recession
1 10  0 - -10 -1 -0 1988 1989 Winners 1990 1991 199 Losers 199 199 199 1996 1997

Average ROIC relative to industry

Winners are those that outperformed others in their industry for the six years following the recession of 1990-1991; losers are those that underperformed others in the industry.

A focus on high performance

In uncertain times, organizations have two fundamental choices: to hunker down or strengthen their strategic position. Which is the winning strategy? Accentures ongoing research into High Performance Business and our experience in working with clients have yielded important insights into how high performers distinguish themselves. Among our findings in studying more than 6,000 companies: highperformance businesses act decisively at all times. They are realistic about the pressures of today and optimistic about the opportunities of tomorrow, which enables them to outperform their peers in revenue growth, profitability, cash flow and total return to shareholders. And, these businesses sustain and increase that superiority over time. Does this hold true even in a slowdown? Absolutely, and to get a closer look at how leading companies

managed their businesses during the last downturn, Accenture analyzed the financial results of 80 companies in the United States that experienced the recession of 1990-1991. Based on return on invested capital (ROIC), we separated them into three categories: winnersthose that out-performed their industry for six years following the recession; losersthose that underperformed their industry; and average performersthose that ended up in the middle. We found that winners took the bolder path. While attentive to current cost structure, they kept their eye on the prize: building sustainable future value for the company and its shareholders. In essence the winners pursued an and strategy, not an either/or direction. Through practicing Rapid and Sustained Cost Management, they were able to strengthen their strategic positions in areas of the business where costs were not competitive.

These industry leaders invested to strengthen existing positions and take market share, often trading off a low ROIC in the early years for a high ROIC later. Strategies included acquisitions, forays into new markets, organic growth in adjacent markets, business unit divestments and new product lines. At the same time, they used Rapid and Sustained Cost Management to provide cash for value-building opportunities. Winning organizations did not randomly hack away at the typical expenses such as travel, training, marketing and across the board arbitrary headcount reductions. They made sure they understood the strategic impact and sustainability of their cost-optimizing actions. The result: a company well positioned to achieve high performance by dramatically outpacing the competition when the economy stabilized.
1Jane Linder and Brian McCarthy, When Good

Management Shows: Creating Value in an Uncertain Economy, Accenture Management Consulting Research Report, August 2008.

Figure . Illustrative scope of typical quick-win opportunity assessment

Size of opportunity High

Low Hanging Fruit Implement new car policy Reduce POS obsolescence Reduce Agency Fees Phase vacancies Challenge Consultant spend Optimize office space Apply limit on monthly mobile cost per employee Apply policy limit on Office Supplies Reduce Customer Relationship Management spend Reduce frequency of travel Apply lodging limits Apply per diem amount Apply policy limit on Courier Apply policy limit on Training Apply policy limit on Gifts Challenge Market Research expenses High Ease of implementation

Optimize space in sales centers Medium

Low

Introduce light sensors in offices

Enhance Employee Referral Program and E-recruitment

Low

Medium

Quick-win opportunities
A quick-win opportunity assessment holds the potential to deliver promising results in a short time frame. Accenture works with an organization to assess business functions and cross-functional costs associated with them. The assessment provides transparency on expenses andthrough internal and external benchmarkingidentifies tangible cost-saving opportunities. Accenture then performs analyses to substantiate the savings opportunities and identify easily achievable and meaningful cost savings to be prioritized for implementation. In our experience, Accenture has found that through quick-win assessments, clients identify significant savings in a variety of areas.

Instilling cultural change

Implementing Rapid and Sustained Cost Management usually requires people throughout an organization to adopt a cost-conscious, or value-centered, mindset. A focus on people is as much a requirement for Rapid and Sustained Cost Management as a focus on the costs themselves. In many organizations, the shift in mindset will require a cultural change. One of the consistent features of a high-performance business, in fact, is a value-centered culture that focuses on achieving excellence in those areas that set the business apart from industry peers. Such a culture optimizes the delivery of value to multiple stakeholders through careful decisions regarding business strategy and resource deployment. It infuses an organization with financial acumen, governance and discipline so that everyones behavior is consistently focused on the common objective of

delivering sustainable and superior total shareholder returns. Because it is a fact-based environment, a value-centered culture supports the management processes required to identify new value-creation opportunities, as well as the discipline to manage and act on those opportunities. This culture also includes the ability to balance the delivery of current value with the investments required to develop future value. Effective communications and organizational design are essential to creating a value-centered culture. Engaged employees are those who understand how their personal actions contribute to the success of the company. Creating the link between organizational mission and an employee's role within that missionas well as igniting a passion for outstanding performance is essential to building a value-centered culture.

Delivering tangible results

A leading global automotive supplier was divesting parts of its business and needed to aggressively hit certain cost targets. The company called on Accenture for assistance, and together, teams from both organizations applied Rapid and Sustained Cost Management to accelerate results. Joint teams started with a selling, general and administrative expenses (SG&A) cost takeout, exhaustively examining all areas of SG&A, starting with the better-known areas (for example, information technology, finance, HR, indirect procurement, sales & marketing), leveraging internal and external benchmarks with industry knowledge to identify initial cost-saving opportunities. This then broadened to include examining a comprehensive set of 18 SG&A related areas, across the companys US and European businesses, identifying cost savings opportunities within each area. Efforts quickly expanded into cost-reduction efforts within cost of goods sold (COGS) and broader supply chain areas. Global savings identified within three months from the SG&A restructuring alone exceeded $10 million, and specific action plans were developed and executed against to achieve committed targets. Ultimately, the divestiture and cost savings implementation were executed without significant impact to ongoing company operations. In another example, Accenture collaborated with a manufacturer of products for the recreational industry to drive cost improvements through Rapid and Sustained Cost Management to achieve reductions quickly in the short term, and subsequently, longerterm initiatives. Accenture focused work efforts to target high-impact improvement levers in the areas of SG&A, warranty, direct manufacturing, supply chain and logistics, indirect materials and direct materials including vertically integrated parts and operations. In five months, Accenture identified cost reductions of more than $0 million.

Some organizations falter in their attempts to establish a viable value-centered culture because, after an initial push, not enough work is done to sustain the culture over the course of the journey. Strong journey management capabilities are essential, including effective leadership. Senior leadership must be prepared to play the role of chief evangelist for valuecentered thinking within their organizations. A strong analytical framework is also necessaryone that measures value creation and that shows how each facet of the enterprise contributes to the overall value proposition. Finally, it is important to assess progress on the journey. When a value-centered culture is alive and well, employees at every level have a better grasp of their contribution to their organization's success.

Investing for innovation

The economic environment is challenging, and profit margins and cash flow are under intense pressure. Rapid and Sustained Cost Management is one approach that can help companies address their cost challenges. The objective: helping the organization to institute enhanced rigor around its cost-management processes to drive margins and cash-flow improvements needed to fund and grow initiatives especially those around innovations that enable product differentiation. Getting there requires a focus on high performance. Rapid and Sustained Cost Management is one vital way Accenture can help your company achieve success. In the pursuit of high performance, every angle of gain, every push forward, every advantageous idea helps sharpen the companys competitive edgeand Rapid and Sustained Cost Management is one of those ideas.

Contact us
To find out how Accenture can help put your company on the path to high performance with Rapid and Sustained Cost Management, contact: James Robbins Senior Executive North American Automotive Industrial Equipment Industry Lead james.a.robbins@accenture.com 678.67.77 Christopher McManus Senior Executive Finance and Performance Management Service Line christopher.mcmanus@accenture.com 678.67.77 Margo Gorra-Stockman Senior Manager North American Automotive Industrial Equipment Industry margo.gorra-stockman@accenture.com 70.97.717

About Accenture
Accenture is a global management consulting, technology services and outsourcing company. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the worlds most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. With more than 186,000 people serving clients in over 10 countries, the company generated net revenues of US$.9 billion for the fiscal year ended Aug. 1, 008. Its home page is www.accenture.com.

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