In tough economic times, management may take a ruthless approach to various areas of the business where they perceive costs as being too high. For example, they immediately cut the marketing budget – when in fact marketing may be more critical than ever before. Or they trim down expenditure on IT systems, when investing in more streamlined IT processes can quickly turn into a cost saving.
Typically, costs within a company are being divided into pure operational costs – but these, in themselves, have massive indirect costs (head office expenses, FICA [for banks], IT, etc.). But in taking this approach, businesses usually have little to no idea of what the true cost to provide their service/product is.
Hiding more than it reveals
Essentially, management teams fail to look at costs relative to the value they produce. Cutting costs can be smart and prudent – when those costs are not creating significant value for the business. But when they are, and the value is overlooked, then cutting costs will ultimately harm short and long-term growth.
For example, if you are a food retailer, and providing fresh produce is one of your critical selling points for customers, then cutting down on delivery and logistical expenditures would not be ideal. In fact, spending more on ensuring delivery is timely and efficient could be the smart move, in this scenario.
In today’s increasingly complex – and fast changing – operating environment, businesses need to take a far more scientific and ultimately data-driven approach to managing costs. Given the huge amounts of data now being produced on a daily basis, businesses have no lack of information. (Arguably, they are drowning in information).
The real challenge is to ask the right questions – and then look at the correct data for answers. Data is almost useless without a very specific and clearly constructed approach. Research firm Gartner has used the analogy of a pond, with regards to the data explosion. Ignore the pond, they advise decision-makers, and first decide what information it is that you’re seeking – and then go fishing.
The good news for businesses is that technology is quickly evolving to be able to provide the type of actionable intelligence they so desperately need. First, however, business leaders will have to shift their fundamental approach – from cost management to value management.
Only by making this shift can they capitalise on the promise of smart technology and data-driven analysis
Adapted from engineeringnews