Published: November 01, 2009
Experience suggests that two of the biggest changes any business will ever go through are a major cost-cutting programme or a merger/acquisition – with the former particularly relevant in the current climate. In both cases, organisations have to take a long, hard look at every aspect of their operations in order to derive the last penny of value. When value is measured in monetary terms, as it usually is, that means they have to understand what impact these changes will have on their cash flow in both the long and short terms.
It is vital for companies to know exactly how costs are being affected, whether by changes in staffing levels, operational expenditure or asset base.
When a company undertakes a cost-reduction programme, it needs to be able to keep a close eye on the savings that are being made. For example, in the case of redundancies, there is likely to be an initial outlay in severance packages, but there will then be a cost saving as the relevant salary payments no longer have to be made. Similarly, disposing of assets (e.g., through office closures) can result in a large injection of cash, although this may be staggered over a number of payments. In order to manage their cash flow effectively, companies need to keep track of when these payments are due.
All in all, it is vital for companies to know exactly how costs are being affected, whether by changes in staffing levels, operational expenditure or asset base. After a merger or acquisition, it is especially necessary to determine accurately where there is duplication of effort – it’s not cost-effective, for example, to have two departments carrying out the same work.
Failure to keep a close eye on all these developments, or reliance on inadequate monitoring processes, will mean that companies will be unable to track their incoming and outgoing monies effectively. After a merger or reorganisation, it becomes very much harder to calculate accurately the effects of synergies; after an internal cost-reduction programme, financial information and cash flow have to be consolidated from different systems (and often, in larger organisations, from different locations around the world). Any failures in the process can lead to major problems further down the line.
However, these issues are only part of a much larger whole. Most companies are pretty good at identifying what has to be done to cut costs and where the benefits need to come from: in most cases, the research has been done by the finance and project teams ahead of time. What is often lacking is a robust process which will accurately and consistently track the savings generated over the entire period of the programme. Often this is because benefits-tracking is seen as a time-consuming addition to the expense of time, effort and resources required to identify and capture those benefits in the first place.
Furthermore, these major cost-reduction or post-merger programmes often involve a range of stakeholders. These typically have their own systems, their own ways of reporting data and their own approach – which hinders the production of reliable and precise data for reporting purposes.
With so many problems in the way of accurate benefits-tracking, it is not surprising that senior managers can end up making decisions based on underlying numbers that have, at best, varying degrees of accuracy. If financial data is not consistently captured or reported, whether as part of the cost-cutting initiative or across the newly expanded enterprise, decision makers will struggle to know whether programme goals are being achieved or what is the best course of action. They will also have little or no idea how their cash flow is being affected by those programmes and if they are actually achieving the expected savings.
This is where technology has a key role to play. It can make all the difference when senior management is trying to understand how the cost-reduction programmes are performing. Often data is reported and analysed in a series of stand-alone spreadsheets or unconnected systems with no proper work flow and no real consistency. For example, the costs being saved in Project A are reported in a different format from those in Project B, while Project C has twelve separate contributors, all of whom keep their own copies of the spreadsheet that they update without any input from the rest of the team.
This results in a process that is time-consuming and painful – and things slip through the cracks. The board could easily find itself making major strategic decisions based on inaccurate cash flow data with no clear audit trail. And these cost-cutting or restructuring programmes often run for years, with participants coming and going, so there can be no consistency. Another problem is that having to change results opens a can of worms with regard to corporate governance and compliance. No publicly-listed corporate entity wants to go back to the market regularly and restate its profits because the board was given erroneous data on the success of its cost-cutting exercises.[[[PAGE]]]
Getting rid of ‘spreadsheet slavery’Fortunately, there are solutions. Collaborative technology solves these problems by removing the ‘spreadsheet slavery’ that has long characterised change programmes. Instead, businesses can employ a single benefits-tracking tool, such as qantif, to establish a consistent process across multiple cost-cutting programmes. This allows teams to spend more time on generating benefits and less time tracking them. Research has found that effective benefits-tracking technology can cut between 20% and 40% from the time involved in managing the process. This makes it far less of a chore for those involved and helps to engage employees in ensuring the programme’s success.
If everyone involved in a project (e.g., finance, project managers) is using the same system to log his/her results, and each contributor’s efforts have been signed off by the appropriate manager, then the board can have total confidence that the data they’re seeing is as accurate as possible. Equally, the projects they run tomorrow will use the same system as the ones they are running today.
Research has revealed that roughly half of all mergers and acquisitions fail to deliver the business value they set out to achieve. Similarly, a disturbingly high proportion of internal cost-cutting initiatives do not hit the targets that were put in place at the outset. This is bad enough in a thriving market; with the economy in recession it can be fatal.
Instilling confidenceCollaborative benefits-tracking technology does not have all the answers and certainly cannot guarantee the success of any change programme. What it can do is to ensure that organisations can establish a robust and lasting benefits-tracking process – one that will instil confidence in their cost-cutting programmes and ensure they maintain full control over how those benefits are realised and how they affect cash flow.
For example, if an organisation aims to save £100m, it can track every last penny, as opposed to achieving £75m and then hitting a brick wall because its understanding of the remaining projects is either inconsistent or has ‘got lost’ among all the other business initiatives. That may sound unrealistic when so much is at stake, but experience shows that it can easily happen: a few thousand here, another few thousand there, and the losses soon mount up.
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