Most project goals aim to improve an organisation’s capability, and in doing so often creates efficiencies, but what happens when the goal itself is the cost out.
With a potential downturn on the horizon, defensive strategies become the priority and cost out projects become the vehicle.
It’s quite common for project benefits to come with a cost reduction that may be driven from outcomes like process efficiencies, improved inventory management, energy or technology utilisation and labour optimisations. A cost out project is one that has a singular specific goal to reduce or optimize costs
Let’s examine how that affects outcomes and the organisation.
The Good – Be effective first, then efficient
Having heard a great executive leader once say, ‘Be effective first, then efficient’, they were reminding the project team that the most important goal is to deliver something that works first. There is no value in having an efficient process that doesn’t deliver a result. However, there is always a way to make something working more efficient.
The same can be said for cost-out projects.
Taking a well-oiled machine that functions predictably and consistently delivers the intended result. It can benefit from an investment that will further optimise how it runs and what costs and resources it consumes. When it’s not working as intended, often the biggest efficiency gain comes from just getting it right. This removes waste, re-work, delays, and other cost side effects like complaints handling and escalations resulting from poor quality, thus increasing the effort to outcome return.
Keen readers will note the ‘good’ is not focusing just on the cost; instead, it’s driving cost reductions through improvements to quality and consistency.
In the right context, cost-outs can be effective, particularly when the project itself has a hard cost-out that has a simple link to the scope. For example, if application X is upgraded at Y cost, the old server with expensive licence and support cost can be saved by running application X in the cloud with no impact to users.
This type of cost-out project has controllable impacts to customers and staff and has a tangible and real cost benefit as a result. Just takes time and money to do that cannot be achieved in a BAU budget.
The Bad – Tunnel vision
The bad side of cost-out projects come from focusing on cost as the goal, which may sound counterintuitive when reducing cost is of great importance. But herein lies the challenge.
A focus on cost negatively skews decision-making and prioritisation across the project team, Steerco and even the portfolio. The result is that instead of delivering improvements, the project creates changes that generally push the limits of the existing capabilities, playing out a real-life ‘do more with less’ scenario. A robust capability might hold up quality with cost measures applied, but a cost-out project impacting a struggling capability or function is a recipe for disaster.
Ultimately it is the customer and employee experience that suffers, and one can argue if the value of the cost out is equal or greater to the effects of poor customer service. For organisations that rely on repeat sales and business, poor customer experiences can accelerate the effect of the downturn.
At a high level, this pull and push between cost and quality seem simple to manage, but the reality is much more nuanced. Projects require thousands of decisions to be made of all sizes and at all levels, from the way a BA chooses to write a user story to a major inclusion or exclusion of scope at a Steerco.
The tunnel vision of a cost-out project can affect decisions that can erode quality and capabilities and can create legacy and tech debt that will need to be addressed in the future that might not always be obvious during the decision-making process. Often the case becomes a trade-off between a short-term cost out that comes with long-term issues.
The Unintended Consequences – Culture, talent and strategic distraction
Typically, most organisations go through a business cycle of growth and innovation, then optimisation, meaning they will invest in new capabilities, products, or services, then focus on improving the performance of those capabilities, products, or services. How the optimisation phase is approached can have unintended and negative consequences.
Let’s examine some causes and effects.
Treating cost-out projects differently from ‘normal’ projects: This may be done to separately track and focus effort on a cost-out target but can result in poor categorisation and decision-making when trying to decide what type of project one is and how it is then governed and driven. For example, digitising a process can be both a cost-out initiative and a strategic initiative as it can improve the customer experience and reduce cost. If categorised cost out and driven with tunnel vision on cost, the project will likely become compromised and may fail.
Lack of buy-in and benefit risks of ‘cost-out projects’: Accountability can be very challenging to identify and hold for a cost-out project, particularly if project failure is high. Leaders will be reluctant to sign up to cost out benefits that hit their operational budget if they are not certain and confident that the project can deliver the required scope and outcomes that won’t leave them on the hook for savings that they can’t deliver on. If running more than one cost-out initiative, leaders must contend with moving baselines and ensure that each business case takes into account the baseline impacts of other initiatives to avoid the potential for double counting.
Impact on well-being, talent retention and productivity: Cost out as a primary focus creates a lot of uncertainty and mistrust in an organisation. Projects or portfolios that are labelled cost out are overt signs that staff see as prioritising cost above all else, which can disengage the workforce and negatively influence productivity and quality.
Communication is a critical part of managing cost-outs
Optimisation is a normal part of the business cycle. With the potential impact of a downturn on the horizon, leaders are looking ahead to manage an effective cost optimisation strategy as a mission-critical imperative.
Communication throughout this stage of the business cycle is critical to success. A clear understanding of the necessity to reduce cost is important and this can be difficult to land in a “good news only” culture. Success will require some candid and transparent communication about organisation performance and profitability to justify why cost-out projects are being initiated.
Why is this important? To maintain integrity and trust in leadership from those impacted and to engage and inspire the workforces that are working through a difficult time. Failing to do so will result in staff asking themselves, ‘why are the town hall conversations all about how good everything is, but then we are doing a lot of cost-out projects…?’ The inconsistency will be obvious to most staff, as you can guarantee that staff do not see the potential redundancies that come from cost-out projects as a good sign. Facing into the challenge, accepting that it’s difficult and making commitments to work with staff respectfully and collaboratively acknowledges what they already feel and know.
To find out more about how Quay Consulting can help your team manage benefit risk in your organisation, please contact us.
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