10 Rules for Cost Reduction

10953726100?profile=RESIZE_710xCost Transformation is a challenge that a firm must confront several times during its lifetime.  Effective and lasting Cost Transformation affords organizations the chance to alter their whole direction.  It may result in the sale of existing enterprises, even if they are successful, in the event that they do not align with the Strategy or the company's most distinctive capabilities.

Of late, Activist Shareholders are increasingly driving such Transformations.

Activist shareholders are investors in a corporation (often hedge funds) who want radical changes to the way organizations do business.  Activist investors often envisage that management teams will quite significantly decrease expenses within a very short time frame.

Analysis of data shows that activist shareholders have generated double-digit returns for investors, when other investment funds generated single-digit returns.  Investors now seek activist funds in their portfolios with growing frequency.

Organizations can prepare for these funds by foreseeing the changes demanded by activist shareholders and implementing a proactive approach to reducing enterprise costs.

Organizations may benefit from activist investors approach in times of intense cost reduction pressure, such as in a recession.

Although unorthodox, the activist investor approach to Cost Transformation may be modified to assist firms maneuver through times of uncertainty.  Companies may demonstrate foresight by proactively adopting control of their cost base and creating stronger and productive organization.

The following 10 principles for Cost Transformation were developed by PwC's experts to assist corporations in executing the activist role themselves.


  1. Transform sizably and quickly.
  2. Reduce headcount first.
  3. Rationalize what to retain, not what to eliminate.
  4. Create atmosphere of possibilities not dread.
  5. Stir the executive levels determinedly.
  6. Review in entirety, even the protected interests.
  7. Form an adjacent setup for Change Management.
  8. Question the manner of conducting business.
  9. Review end-to-end processes.
  10. Exhibit instant successes.


Initial 5 principles reflect the tough objectives of activist shareholders.  Following 5 concentrate on strategic cost reduction and streamlining, which are the core ideas around which every program should be constructed.

Let's go a little more into a few of the principles.

  1. Transform Sizably and Quickly

The past method of cutting expenses, for instance by 10% over a 5-year period, is no longer acceptable to activist shareholders.  They want a substantial decrease over a very short period of time, such as 20% or more in 24 months, with 50% of the decrease occurring in the initial 12 to 18 months.

It has been demonstrated that rapidly and substantially transforming expenses provides substantial leverage.  A study of 29 cost-cutting initiatives revealed that organizations that cut costs sizably and quickly were able to generate 33% greater cost savings in practically a 1/3rd of the time.

  1. Reduce Headcount First

Traditional model of cost reduction recommends removing superfluous work before lowering headcount.  This requires a considerable amount of time, for several reasons.  The new strategy prioritizes headcount reduction above process and system modifications.

Lowering headcount creates a gap, which the remaining staff must fill so as to keep their portion of the firm operational.  By stepping up, the remaining employees are compelled to select and manage tasks, resulting in more effective and efficient operations.

  1. Rationalize What to Retain, Not What to Eliminate

Entire spending is investment.  Each expense is a choice, not in terms of what to cut from the budget, but where to invest.  Expenses must be rethought from the ground up; each expenditure must be seen as potentially eliminable.  Correct decisions are those that diminish the gap between Strategy and Execution.

Interested in learning more about 10 Rules for Cost Reorganization?  You can download an editable PowerPoint presentation on 10 principles for Cost Transformation here on the Flevy documents marketplace.

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