Executives are constantly aiming to cut costs and utilize finances effectively in the organisation yet many still get it wrong. Harvard Business Publishing interviews Cesare Mainardi co-author of The Essential Advantage and Cut Costs and Grow Stronger, to find the secrets to successful cost reduction.

“The problem companies make is to cut costs across the board“says Mainardi. He believes many executives are aware that this approach is incorrect, but pressures to minimize expenses and tighten spending often leads to a cost cutting frenzy.

The first point to note is that ‘the activity of expense reduction is a strategic choice’. It is a thoughtful process that examines all the elements of the organisation before coming to a decision.’ Companies need to make some sharp decisions about what is important what is strategic and cut costs around that’ says Mainardi.

This exercise centres on identifying critical activities, and defining the activities which contribute to essential capabilities. ‘Firms should concentrate on expense around capabilities that make a real difference’. Capabilities refer to the elements that give a company its competitive edge and can include, ‘a combination of know-how, expertise, people and processes…’

Managers can uncover these capabilities by asking questions such as ‘what makes a real difference in the business?’ Generally these capabilities are limited to, between three and five, specific business elements.

Once capabilities are established, executives can identify activities that do not contribute to those capabilities. By engaging in this exercise managers can ‘cut costs where things matter less and invest in areas that will cause the business to thrive and grow’.

According to Mainardi ‘top management needs to be involved with these decisions” and should in effect direct this process. It is the responsibility of management to determine the hypothesis, based on the core capabilities of the organisation, and filter this theory into the teams or departments.

Mainardi says that once teams have implemented this hypothesis they should report back on ‘whether the hypothesis was right or wrong, where risks or trade-offs entailed when going down the path of reducing costs in some places and investing in others”.

Mainardi reminds executives that this is an ‘iterative process’ and requires the participation of both management and teams in order to be successful.

Cesare R. Mainardi is the Chief Operating Officer of Booz & Company, a global management consulting firm, which helps the world's top businesses, governments, and other institutions to create and deliver essential advantage by building capabilities that deliver real impact.

For more tips on how to reduce company expenses view his interview titled, ‘How to cut costs strategically’.

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