Friday, 14 May 2010

The Big Spending Cuts Challenge.

The new Cameron government has now looked at the books, gulped, and is now going to spend the next few weeks trying to work out exactly how to reduce spending in the quickest but least painful way possible - without putting lots of people out of work and without slashing public services. In other words trying to avoid throwing the baby out with the bathwater..

A couple of years ago I spent a year working as a consultant to a small group of management consultants who specialised in exactly this area - working with local government and large and medium sized businesses. My job was to help them sell and market their capabilities - so I spent a lot of time understanding their methodologies and getting hands-on-experience:

The first and most obvious way to save money, is to look at reducing external spending - i.e. the money that is not spent internally on salaries and people but on buying goods and services externally. These savings tend to be easier and faster to achieve than 're-deploying' or making internal staff redundant but when major cuts are needed can be a very useful complement to this.

There are four key levers as follows - these apply to both external procurement and internal cost cutting.

Consolidation - Essentially consolidating purchases of same or like items in order to buy them more competitively (i.e. leveraging volume). The same applies to like or similar functions in an organisation - e.g. consolidating functions to reduce management costs.

Negotiation - Essentially getting better deals for goods or services by going out to the market and re-negotiating. Most organisations buy habitually from a limited number of suppliers - there is almost always scope to reduce costs simply by going out to the market. It follows that you first consolidate volume and then negotiate to achieve better value based on volume.

Specification - Essentially analysing the key needs and requirements for any given product, service or organisational function and stripping it down to the essential outcomes or outputs it must deliver. This can very often deliver surprisingly significant savings - over-specification is a classic scenario particularly following periods when plenty of cash has been available.

Structure - Essentially re-structuring the way in which functions are performed to make them more efficient, less labour intensive and less costly to resource.

These four levers are described in order - i.e. the first levers are the easiest to use but are less likely to result in dramatic savings than the later levers.

In practice, most time is usually spent on specification and structure - i.e. working out how to re-configure functions in order to deliver the essential requirements in the most effective way possible...


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