Traditionally cost reduction tends to be a short, sharp initiative that may only have a short-term effect because the underlying causes of the problems have not been addressed. An Activity Based cost reduction exercise, however, should provide the basis for better ongoing cost management, but will not replace existing methods of cost management. Ways of managing the cost base depend on ongoing planning and control of all aspects of the business.
Analysis by activity also allows a fundamental rethink of the way the institution is organised and how it operates and may result in radical reorganisation.
The primary benefit of using Activity Based costs rather than any other form of costing lies in the essence of the technique itself. Activity Based Costing focuses on activities not responsibilities. It depersonalises the cost review and enables management to value the activities undertaken in relation to the level and/or quality of service provided and factors which cause the costs to be incurred.
Implementing cost reduction in practice requires strong commitment from senior management and sponsorship at board level. Without this kind of commitment, the initiative is likely to flounder when politically complex decisions must be taken relating to reorganisation and redundancy.
Our experience shows that an external facilitator can provide significant value to this type of cost reduction exercise. We can provide this type of facilitation.