Florian Krueger

Review Your Calculus of Cost

In 2.0, Management on August 7, 2009 at 9:08 am

As recently as a year or so ago, much of management’s attention was trained on growth and how to generate sustained performance over the long term.  In some cases, cost control took a back seat, with cost patterns masked by year-over-year increases in the top line.  In the 2009 economy, however, cost management is again front and centre, critical to short-term recovery and long-term success.

Companies must now focus on cost control, and that presents an opportunity to tune the business to today’s economic realities.  But we cannot cost-cut our way to renewed prosperity, and how we handle cost control today may well determine how fast prosperity returns.  The challenge is to measure accurately the corporation’s complex array of costs, understand their drivers and patterns, and control them in ways that won’t restrict the company on the way up as markets strengthen and growth returns to the agenda.

Now is the time to review your calculus of cost, the science and strategy of effective and forward-looking cost management.  Below are nine questions CEOs and their executives teams should be asking now – and regularly – about costs.  And as you ask them, keep in mind the overarching question: how complete, accurate and informative are our cost measurements to begin with?

1.   What is the exact cost of doing business with each of our customers?
2.   Are we losing business by causing unnecessary costs for our customers, or taxing ourselves by generating unnecessary costs for our suppliers?
3.   Do we still have the right mix of evaluation criteria in our investment and programme management decisions?
4.   Do we build ‘optionality’ into our major investment decisions of all kinds?
5.   Are we managing our talent cost in ways that maintain business capability and employee engagement?
6.   What categories of our expense do not move in concert with revenue, and why?
7.   What should we simply stop doing?
8.   Are we exploiting the learning curve to drive down unit and project costs?
9.   Can we use our cost performance as a differentiator or competitive weapon?

To manage costs well they must be examined in a methodical, objective and data-driven manner.  Anticipatory and analytical cost management works no matter where you are in the business cycle.

This is an extract from our Boardroom Imperative Review your Calculus of Cost.  A copy of the full document can be downloaded from our website.

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  1. This doesn’t look like calculus to me. There is a difference between reviewing costs (first order) and reviewing the calculus of costs (second order). For example, you could be talking about shifting the balance of costs between fixed cost and variable cost.

    http://rvsoapbox.blogspot.com/search/label/algebra

    • Richard, thx for your input. I think you have some good point here. It is a question of the definition of the calculus bit. As you can see above, we define it as: ‘the science and strategy of effective and forward-looking cost management’ . I think it is more about semantics than disagreement, but you certainly add an interesting perspective.

  2. I don’t think this is just quibbling about semantics. Business people may worry about costs, but business analysts and architects and strategists need to pay attention to the structure of costs rather than the tactical details.

    http://rvsoapbox.blogspot.com/2009/08/calculus-of-cost.html

  3. […] (Florian Krueger) poses a set of questions about costs, under the heading Review your calculus of cost. The questions are fair, but the heading is wrong: Florian’s questions are all about […]

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