Scalpel or blunt axe?

By Thijs Bakker

The outbreak of the COVID-19 virus and the intelligent lockdown introduced in response is causing considerable damage to the Dutch economy. In the business sector, 138,966 companies applied for the first NOW support measure, with an average amount granted of €55,963. The support measures - but also other factors - caused the national government's debt to rise in 2020, reaching €48 billion higher in September than at the beginning of the year. For this reason, more and more organizations are looking for an appropriate form of strategic cost management. However, this brings with it many implications. Do you deal decisively with costs within your organization? Or do you prefer to spread the risks by saving in multiple areas?

Strategic cost management, technical budget, cost cutting

Impact of cost cutting

Most CIOs and their business partners will be asked to cut their technical budgets by 10%-14% in coming years, compared to 2020, according to research from Forrester. The corona situation is forcing organizations to cut costs or they won't be able to keep their heads above water. This does not only apply to SMEs; large companies such as ING, Shell, Bam, Tata and KLM recently announced many job cuts. Other organizations are in the (luxury) position of determining a strategy to invest their way out of the crisis.

A good cost management strategy - no matter what the cause - always has a lot to do. This is because the reasons for cost cutting can vary enormously and no company is the same. In order to implement a well-functioning policy on a strategic and tactical level, one must also have an eye for the employees and the culture of the organization company, among other things. Moreover, due to the jungle of possibilities, it is difficult to make a well-founded choice that best suits your organization and employees.

Highberg (formerly known as VKA) sees different approaches to cost savings among its clients. In general, there are two extremes; the 'Scalpel method' or the 'blunt axe method'.

Scalpel

In order to spread risk and impact, a step-by-step method of cost savings is frequently chosen. This could include downsizing IT processes and licenses, but also scaling down availability, performance or innovation within applications. By shaving various IT applications/processes outside the primary process, relatively little damage can be done. Partly because of its low impact, the method is a common compromise. The approach is more ad hoc and therefore suitable for short-term cost savings. However, the method is difficult to reconcile with making strategic choices. Nevertheless, it can be an effective tool for organizations to achieve the cost goal.

Blunt axe

To do cost management in a more strategic manner, one can also choose to follow through with a resolute decision. Examples of this approach include strict portfolio management, divesting legacy applications and, in an extreme case, laying off staff or parting with an organizational unit. An important consideration in decision-making is to what extent a process/application/project actually fits with the organization's core business and has an acceptable payback period. By making such difficult choices, one action achieves many results. Let it be clear that making drastic choices rarely has only positive consequences. Moreover, it also requires a great deal of willingness and dedication. However, partly due to the consequences of the coronavirus, it is a reality for many organizations and therefore a bitter necessity, as it may be one of the last ways to prevent (further) deterioration.

Tips for your organization

While necessity can be a major reason to scrutinize your organization's costs, it can also be looked at from a positive angle. The present time is ideally suited to put your cost management in order, regardless of the underlying reasons.

For both the ‘scalpel’ and the 'blunt axe' methods, it is important to look at the subject of cost management in an integral way. Therefore, whenever possible, involve both the business and IT parties within your organization to formulate a solid decision that also works for the long term. Applying the scalpel to cost management certainly contributes to short-term results, but it rarely really makes your organization better. Sometimes it is precisely a blunt axe that provides the opportunity to build something better and more beautiful.

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