Even with all the data, spreadsheets, and IT systems at a modern CFO’s command, their picture of their business’s costs is unlikely to have the clarity and simplicity of a 13th-century banker’s, making it especially hard, at this critical point in corporate history, to be sure they are managing cost effectively. That’s why the institutionalized approach – ‘a 10% cut in budgets across the board’ – is so appealing. Appealing but potentially dangerous.

 

The key is not to cut costs, but to optimize them. The distinction might sound meaningless but Steve Hill, Global Head of KPMG’s Business Performance Services practice, disagrees. “It’s about getting people to do things better, smarter and more efficiently. You have to look at how to shift assets to value creation. That’s why KPMG firms talk about cost optimization, not reduction or cuts.” The aim is to cut the right costs through operational and organizational change that will ultimately make the business more viable in the long term.

 

Hill suggests one of the first steps is to look at your business in 3D. Focus on key factors as you consider the problems you face: people, processes, technology and risks. “You should look at these in terms of sustainability,” Hill says. “Then measure them to ensure those metrics have been maintained or improved on.”

 

You don’t have to outsource key operations to India to benefit from the principles of frugal engineering. “It’s reverse engineering,” says Hill. “You figure out where you need to be and go back and see how to do it.” In other words, think like a start-up – work out at what price you need to sell your product or service and work backwards.

 

This could mean tearing up established processes and starting again. Every strategy starts to decay the day it is created and you may need to reinvent your business model to compete with newer rivals. “Ask yourself if it’s possible to simplify your business model and whether your model was correct in the first place,” says Hill.

 

When Larry R. Carter became CFO of Cisco Systems in 1995, he was amazed by the size and complexity of the monthly profit statements. Reducing them to a single sheet of A4 was the most obvious way to prove financial processes were being rethought. He went on to amalgamate departments, giving managers the power to restructure them in the most efficient way possible. The sound base he put in place is one reason Cisco now has US$30 billion in cash.

 

It’s good for morale if staff can see that senior management are suffering too. FedEx CEO and founder Fred Smith has taken a 20% pay cut: “All our management compensation is heavily related to the performance of the company,” he says. “At the first-line management level it’s maybe 15% or 20%. At my level it’s 90%. So obviously, as the economy has gotten weaker, a lot of that expense has simply gone away.” Smith’s act of leadership sends out a strong message to staff and investors.

 

It’s easy to emulate your rivals’ cost-cutting strategies, but are they the most effective for your business? “CFOs should look outside their traditional peer group for ideas about cost,” says Aidan Brennan, Head of Performance Advisory for KPMG Europe LLP and  partner in the UK firm. “It's beyond traditional benchmarking, instead asking bigger, more challenging questions by looking for alternative comparisons.”