Operations and Projects are demanding activities that require focus and effort to deliver. Making sure that each contributing piece fits where it should, working closely with all of the people involved and then stretching to reach your goals, is not for the fainthearted. And then, after all of that work, to see hard won value disappear through the back door in cost leakage, can be frustrating and disappointing.
Controlling costs preserves value but it is difficult to manage. The mental model that most of us have, with a buyer on one side and a seller on the other, often gets in the way of managing cost in a professional sense.
From our earliest education, when we were taught the shape and feel of money, through to our normal daily lives of buying goods and services, the simple buyer/seller model has been reinforced. This personal experience and education though, is not always transferable to business.
One of the underlying reasons that cost control is so difficult to manage is that we often underestimate its complexity. There are a lot of people involved, the agreements in place can be complicated and the systems we use to make it all simpler sometimes don’t.
In most business activities of scale, there are people working on the ground to deliver value to clients and customers, people looking after the suppliers, people looking after the buyers, people shifting equipment around, people planning for the future, people looking after the technical integrity of the operation or project, people leading and managing. And they are all contributing to your bottom line.
In an attempt to make this simple we often construct agreements with key suppliers that require legal support, where the terms may not exactly match the value transfer and that hook into systems that have inherent timing delays and adjustments.
Our own systems and accountants then set to work, again trying to simplify the complex environment, but they are often providing clarity well after the time that you can catch issues and anomalies. The volume of transactions then makes it hard to catch those items that shouldn’t be there.
It is no wonder that our simple buyer/seller model steers us into stormy waters, the complexity of these systems are hard to get your head around and they take the effort to understand. If your teams are looking at data when it eventually hits the system, and the people and relationships behind the numbers remain foggy, then they will have little chance of controlling cost.
Understanding that the system is complex though, is the first step to controlling costs. Knowing how the system works gives you the basis of navigating the environment. Then understanding your own cost profile before you spend it, with good forecast and planning methods, gives you the next step.
Watching the costs come through, including the pivotal point of any transaction – the moment you become committed – will give you early insights. Controlling this point of incurrence through your teams and progressively negotiating starts to bring the high transactional load into more clarity.
If you then couple this with a more strategic approach to analyse how you are spending to create value and continually monitor and question, then your cost position becomes much more manageable.
There are a number of ways to put these elements in place and to make them sustainable in your business. The key point though, is that if you can establish them effectively, then cost control gets a lot easier. It moves from a recurrent, lurking issue to something that you just do to deliver.
Managing costs and preserving value is possible. You just need to respect the complexity involved, put in the effort to manage costs appropriately and engage everyone in your team to take part.
Author: Jon Jordans
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