Cost Management Consulting

Cost management consulting is usually bought as cost cutting, and sometimes that is exactly what it should be. What we do first is different: make every cost visible and correctly assigned, so the cuts, and the investments, land where the margin actually lives.

When a cost programme is the right answer, and when it stops being one

I will grant the classic programme its due. When cash is short, when the cost base has drifted up evenly across the whole business, or when a new owner needs a fast reset, "10% across the board" is a reasonable first move, and I have seen it work. It is fast, it is fair in the sense that nobody is singled out, and it does not need a model.

It stops being the right answer the moment costs are unevenly distributed, which in a business with a wide range of products, customers or channels is most of the time. A blanket cut treats every cost as equally bad, because nobody can see which costs are buying profitable work and which are subsidising losses. Eighteen months later the cost base is often back where it was, and the capability that went with it is not. It is a question of when, not if: the cut lands on the work that was paying for everything else, and the number that was supposed to improve goes the other way.

The companies that manage costs well do something slightly different. They invest in cost intelligence first. Once you can see what each product, customer, order and process actually costs, most "cost problems" turn out to be pricing problems, mix problems or process-design problems, each with a sharper, smaller, better-aimed fix than a blanket cut. And some of them turn out to be cost problems after all, in which case you cut, knowing what you are cutting.

Cost management, cost reduction and strategic cost management: three different things

The three phrases get used as if they were one, and the confusion is expensive, so it is worth separating them.

Cost reduction starts from a savings target and works backwards to the line items that will deliver it. It is a project with an end date, and it answers one question: how do we spend less?

Cost management is the ongoing discipline of knowing what things cost and deciding, with that knowledge, what to do about it. Cost reduction is one of its outcomes, alongside repricing, redesigning a service pattern, changing the mix, or investing more in the work that pays.

Strategic cost management is the name John Shank and Vijay Govindarajan gave, in 1993, to cost analysis done in the service of a competitive position rather than of a budget: analysing the value chain from supplier to end customer, deciding whether the business competes on cost or on differentiation, and understanding the structural and executional drivers that cause cost in the first place. It is a broader frame than ours, and I would not claim the whole of it. Where our work sits inside it is the third piece, the cost drivers: a time-driven model that shows which activities consume the capacity you pay for, and which products and customers trigger those activities.

So if you are looking for a firm to run a procurement-led savings programme across a large group, we are probably not the right call, and I would rather say so here than in a proposal. If you are looking for the cost evidence that tells you where a cut, a price change or an investment belongs, that is what this page is about.

The seven dimensions of a cost model that works

Building cost models for more than twenty-five years has taught me that they fail in predictable places. We assess and build along seven dimensions, each one a discipline in its own right:

The free Profit Check scores your organisation on these seven dimensions in about 10 minutes. It is the same framework we use on the first day of an engagement, so the result is a starting point, not a sales exercise.

What it looks like with numbers

A distributor in New Zealand had 1,951 customers and a healthy top line. Once cost to serve was attributed to each account, 830 of those customers were contributing negatively, a combined 1.335 million euros a year. Nothing in the P&L had shown it, because a P&L aggregates everything above the gross-margin line and everything below it. No across-the-board cut would have found it either: the loss was not sitting in a cost line, it was sitting in the way a third of the customers bought. Two years of deliberate decisions later, that loss-making contribution was roughly halved and the number of loss-making customers was down to 295. The full case has the before and after.

I should say that not every model finds a number that size. Sometimes the ranking comes back flatter than expected, and the honest conclusion is that the cost base is broadly where it should be. That is a useful answer too, because it stops a cut that would have done harm.

How an engagement runs

1. Diagnose (3 to 5 weeks, fixed fee). The ProfitAudit 360 builds a working TDABC model on your own financial data and scores all seven dimensions. You see where margin is created and destroyed, usually for the first time.
2. Decide. The margin roadmap ranks actions by impact: reprice these contracts, redesign that service pattern, consolidate this complexity, exit that channel. Cuts appear on the list where they belong, and only there.
3. Embed (6 to 10 weeks). The model goes live, your team is certified on it, and cost intelligence becomes a monthly management routine instead of a one-off study. CostCtrl is where we usually put the model when it has to survive monthly, but the method does not depend on it.

What makes us different from a generalist firm

• One method, deep. We only do cost and profitability modelling with time-driven activity-based costing. No bench of juniors learning on your project.
• Fixed fees. Scope agreed before work starts. Cost consultants who cannot predict their own costs are a bad sign.
• A system, not a study. Every engagement ends with a model your team runs. We design ourselves out.
• Honest about cutting. Sometimes the answer is a cut. When it is, you make it knowing what it buys you, and what it does not.

Frequently asked questions

Sources

• Shank, J. K. and Govindarajan, V. (1993). Strategic Cost Management: The New Tool for Competitive Advantage. Free Press.
• Kaplan, R. S. and Anderson, S. R. (2004). Time-Driven Activity-Based Costing. Harvard Business Review, 82(11).
• Cooper, R. and Kaplan, R. S. (1988). Measure Costs Right: Make the Right Decisions. Harvard Business Review, 66(5).