Almost every company is currently looking for cost reduction measures. And this isn’t surprising. COVID-19, like no other crisis before, forces many companies to reduce costs or completely rethink their business models.
Moreover, many industries forecast a bumpy and lengthy road until business figures reach pre-COVID level again. Although predictions vary from 3 to 5 years, it is evident that many industries and companies face a challenging future.
Since companies have only limited influence to stimulate demand in such a situation, cost reduction is the number one priority. First and foremost, companies focus on primary cost reduction measures. Reducing staff, stepping back from contracts, or provider streamlining, are just a few examples in that context.
COVID-19 Is Going To Impact Operational Process Heavily
On top of that, many industries will face major impacts to their operational processes. Just think about regulations for airlines, airports, or the entire travel and transport industry. Additional requirements for retail shops, restaurants, and many other industries.
To make a long story short: Operational processes in a post-COVID time are likely to be much more complicated than previously. And here’s the problem: Simultaneously, companies are forced to streamline operations and to aim for a sustainable cost reduction.
Accordingly, many companies find themselves in a catch-22 situation. They have to reduce costs in an environment with growing complexity. Undoubtedly, this reflects a significant challenge for every company. You don’t have to be Nostradamus to forecast that not every company will tackle this challenge successfully.
How Can KPIs Help To Achieve Cost Reductions?
I’m obviously not an for every industry. Accordingly, I can’t provide the necessary operational tips and tricks to streamline processes and achieve cost reductions.
However, I have the firm conviction that only companies that rely on comprehensive KPIs can successfully handle the situation. Why’s that? Here are six reasons why your company needs KPIs to manage that situation successfully and achieve sustainable cost redcutions.
#1 — If You Can’t Measure It, You Can’t Improve It!
Pretty sure you heard that saying before. Peter Drucker, a management guru, once said this. And he is so damn right with it. How do you know whether or not you are successful unless success is defined and tracked? Accordingly, every improvement measure and every cost reduction activity needs KPIs. Otherwise, you are relying on gut feelings. And believe me, the current situation is far too severe to act on beliefs.
#2 — KPIs Help To Identify Weaknesses Of A Company. A Necessary Step To Reduce Costs
Although some actions to streamline and reduce costs might be evident, companies won’t have a catalog of 100 cost reduction measures right at the beginning. That means they will have to identify weaknesses and areas to improve. Again, KPIs are the perfect tool in that context. KPIs rationalize feelings. They provide hard facts and figures. And we all know, numbers don’t lie.
Accordingly, companies have to use KPIs to identify the areas that need optimization. And simultaneously, identify areas or processes that show weaknesses.
#3 — Don’t Underestimate The Motivational Factor Of KPIs
I consider KPIs as a vital instrument to motivate employees. A fact many companies completely underrate. Let me give you an example. You identified a specific process you want to improve. Subsequently, you set up the necessary actions and KPIs to measure success. And let’s assume your entire staff is involved in that program.
Now, imagine: After two weeks, you (and the entire team) can see how the KPIs are improving. Every day a little bit. The KPI literally shows that you are on the right track. That your cost reduction measures work. It shows that the effort the entire team is putting into that program is paying off. From my point of view, a super-essential aspect of KPIs. That will lead to even more dedication and motivation for the entire team. Please, don’t underestimate that!
By the way, if you want to know more about that topic, here’s an entire blog post.
#4 — KPIs Give Context And Create Awareness For Cost Reductions
Similar to the latter, KPIs additionally have another advantage that is often underrated. They can help to rationalize situations and provide context to your staff.
I give you a very practical example again from the world of airlines. Every airline is aware of the fact that weak on-time performance leads to increased costs. Costs related to compensation payments, necessary re-bookings, meal or hotel vouchers, and on and on and on. And that’s exactly why airlines are paying attention to the on-time performance.
However, for the majority of an airline’s employees, on-time performance is just a number. They are not aware of the costs behind it. But imagine a KPI that is not showing the on-time performance but a financial figure. A monetary value that calculates the costs related to today’s on-time performance. As a result, you don’t show 87.5% OTP, but $138,475 additional costs due to weak OTP.
I think you recognize the difference. This bold number of $138,475 creates real awareness and will inevitably lead to the fact that airline staff is aware.
#5 – Focus On The Important Cost Reduction Measures
The current situation is a disaster for many companies. And actually a situation not a single company has ever faced before. From my perspective, there’s a huge risk contained in this situation. A risk that’s called “the more, the better.” What does that mean? Actually, this is something we all know from our private life. When we try to do dozens of things simultaneously, the risk of completing none of the tasks is quite high.
And the same accounts for companies in that situation. Probably it isn’t necessary to initiate 20 different cost reduction measures. Perhaps the actions even contradict each other. In that context, KPIs are an essential tool to focus on the important. Here’s how you do that:
- Identify an area you want/have to improve
- Define KPIs that tracks the improvement (and don’t forget tip 3 and 4)
- Set up measures that lead to an improvement of the KPIs
Subsequently, if a cost reduction measure doesn’t improve the respective KPIs, you put them on hold.
#6 — KPIs Help Companies To Make The Right Decisions
In line with the latter, KPIs also help to make the right decisions. I always think of KPIs like a framework the provides orientation for each decision.
Since you always have options, you should assess each option according to your most relevant KPIs. Is an option positively or negatively impacting a KPI?