Strategic Agility in Cost Management

Paul Robinson explains Prof.John R Wells Strategic Agility in Cost Management

Strategic Agility is the ability to remain fluid and respond faster to the changes within and outside your organization through improvements and innovations in products, services, operations and business models. It could be the changes in the market conditions, change in technology, customer needs and preferences, a competitor’s innovative move or reactions to potential trends or forecasts.

Strategically agile companies can stay competitive in their business by adjusting and adapting to new innovative ideas and using these ideas to create new products and services as well as new business models.

An agile organization senses and responds to disruption and opportunity in real time. Strategic agility is one of the only ways to address the high levels of complexity and uncertainty in today’s business environment. Here strategy is treated as a hypothesis about the future, not a prediction. Rather than being “executed,” strategy is “validated” through a process of disciplined experimentation. Experiments are designed to address uncertainties, risk, and hypotheses about customer value. The process of strategy management is one of continuously identifying and testing opportunities while reducing risk and uncertainty.

In cost management, strategic agility has five levels according to John R Wells, a Professor of Management Practice in the Strategy Unit at Harvard Business School.

Level one of cost management is making arbitrary cuts.

It’s a dramatic approach in response to a crisis or anticipated crisis. Here cutting costs means being discretionary with expenses and demand head count reductions across the board.  But cutting cost without tackling the underlying causes is often a short lived solution. Costs have a nasty habit of growing back. According to John R Wells

“Savings promised by the majority of cost reduction program disappear within two years, never delivering the returns required to justify the high price paid for them”

Whenever companies are faced with certain economic crises, they respond faster by cutting down costs. This may involve consolidation, staff reductions, tighter budgeting, selling unprofitable operations, and closing offices and other facilities. Executive positions and layers of management may be eliminated to narrow the channels of authority.

This is purely a reactionary method of preserving the cash flow in order to stabilize the operation costs. This method is good for a short fix, but not a long-term strategy that companies can pursue for long.

Level two cost management is the redesign business processes to meet today’s needs.

Rather than cutting costs, the challenge is to deal with the underlying causes of cost. Instead of reducing the amount of resources to an old process in order to save cost; this approach helps you redesign an old process so that it will require less resources. Reengineering and process innovation are all part of this type of cost management.

One key tool that you can apply here is the Business Process Redesign with the objective of achieving a quantum jump in performance measures such as return on investment (ROI), cost reduction, and quality of service.  You can apply this strategic redesign of critical processes, from manufacturing and production to sales and customer service. 

Many companies undergo business process redesigns because of changes in the industry that require new infrastructure to remain competitive. In some cases, companies may be required to make radical changes by completely scrapping their processes and adopting new ones. 

One good thing about business process redesign is that it can very well suit to your current requirement when time and money pressures surfaces in an organization.

Level three cost management is the redesign of business process to meet tomorrow’s needs

Strategic agility requires a mindset to deal with today’s challenge with tomorrow in mind. There is a danger of changing processes to meet today’s immediate needs without paying attention to the future, so that when business improves another expensive process redesign is required. The process redesign should take place when the firm is ready to expand its activities when the time is ripe.

Here the key skill is scenario planning not only to reduce the risks of crisis scenarios of the future but also to test different hypothesis of what might the future brings in.  most companies are busy fitting into the needs of today and they miss out on the future. When you are too busy working on something, you tend to forget to work towards something. Being prepared for the future is the key here. The challenge is to keep businesses future ready and execute the process design when time is ripe.

Level four cost management is meeting unforeseen needs

There are unforeseen events that can demand sudden changes in an organization. To be future proof means the ability to adapt and move faster when circumstances change due to unforeseen events. It is not easy to design a set of processes to meet every eventuality. At the same time, you can’t ignore a redesign of all of its processes every time it encounters change. Without changing the entire architecture, this form of cost management is done by changing only few components. You make necessary changes to meet the challenges through tweaking, rearrangement, addition or deletion of minor components in the cost processes. It’s important to act with agility during black swan events.  In a time of VUCA, volatility, uncertainty, complexity and ambiguity in the business climate, the major irony is that these unforeseen changes can happen too often and too frequently.

Level five cost management is Self-Adaptive Systems

Each process must be adaptable, self-improving systems to meet diverse needs. People who are responsible for processes constantly look out for ways to improve it, to make it economical, better, faster, cheaper and friendlier. If they are incentivized to behave in this way, then when changes occur the process is quickly modified to meet the new needs. The process and the people who operate it form a component of the organization. To be really adaptive and agile the component team must have the ability to modify and improve the process themselves. This makes for really rapid response. The component and the organization as a whole, then become much more agile and adaptive.

What makes an organization more agile is an environment of trust where information flows freely from verticals to divisions and team to the rest of the people in an organization. Information, conversations, and feedback about strategy should flow efficiently up and down through the organization.  There must be a system in place to capture information once and at the source. 

Instead of creating an additional process to capture information while a process is ongoing, change the initial process so that data capture is incorporated into it. It’s an easy way to refine the amount of time, energy and input required.  Once you are able to capture data, empower people to work with autonomy to make right decisions based on the data available to them. Give the people who perform processes the power to make decisions regarding them. If there are three levels of approval for a simple, everyday process then ask yourself why. Strip away unnecessary red tape and create a single approval system where possible.

Agility and speed happens when you the senior management trust the juniors and vice versa. Trust within team determines the speed of execution. If there is low trust, there is slow execution or no execution.

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