Vat

Process optimization - key rules

Maciej Krzekotowski, Director of the Business Consulting Department
8/10/2020
Vat
Cost optimization at a company has been a constant concern throughout the years. In the current economic situation, it has gained much more importance and significance. Where to begin the optimization process and what issues should be taken into account so that such an action will bring the greatest benefits?

Optimization is an ongoing process

No matter what cost-optimizing measures a company undertakes, they should remain a constant goal for people managing the company - both in good and bad times. This is because it is one of the tools for a company to achieve its business goals - not only in terms of generating financial profits, but also maintaining financial liquidity.

Optimization can reduce costs by up to 25% and help to develop practices which stop their uncontrolled growth. Well conducted activities allow releasing, on average, from a few to a dozen jobs, which do not always affect cost reduction, but provide additional resources for the implementation of new projects and operations.

Optimization vs. cost reduction

To begin with, it is worth explaining what exactly cost optimization is. This concept is quite often confused with cost reduction, but it does not mean the same thing. Cost optimization is a kind of investment in your own company. Cost reduction is a much narrower term. As its name suggests, it is a reduction, a limitation of incurred expenses, often accompanied by giving up certain projects, operations or corporate functions. Cost reduction is one of the tools to optimize costs, but not the only one. It is used as the last possible way if the financial situation of a company is bad or if there is an excessive cost increase and its reduction will not affect the planned actions, budget implementation and the quality of goods and services offered. Another term worth mentioning is cost flexibility, which is particularly important in the current uncertain situation. It is nothing else but the ability of an organisation - depending on the market situation - to temporarily reduce or increase costs (quickly, efficiently, without much impact on the functioning of a company) or efficiently transfer them between functions and operational processes. The organisation's expertise in this area allows it to survive harder times - such as those caused by the COVID-19 pandemic. At the same time, it ensures its ability to operate in the long term regardless of the market situation.

Flexible cost structure

Every organisation, regardless of its financial standing, should carry out systematic optimization actions allowing for the most flexible cost structure to be built so that cost reduction - particularly sudden and unplanned - becomes unnecessary.

Cost optimization involves:

  • Analysis and optimization of operating costs of the main organization's processes - guaranteeing the production of goods or service delivery. These costs directly affect the pricing policy, quality and the revenues achieved. We are talking about costs of materials, production process, logistics and distribution.
  • Verification of the costs of the day-to-day operation of an enterprise, such as administrative costs, costs related to accounting, human resources, legal and IT services, costs incurred for sales and marketing activities, telecommunication expenses, energy, costs of real estate and office materials.
  • Optimization of the main (key) business processes, increasing their efficiency, reorganization of the strategic areas of the company's functioning and organizational structure, as necessary, and streamlining the management and decision-making process.
  • Optimization of support processes, i.e. processes necessary for the functioning of a company, but not aimed at production / delivery of the main products and services - purchases, sales, accounting, controlling, personnel, payroll, IT, legal department, OHS, quality and others.
  • Optimization of the costs of employment in all areas - not only by verifying the possibility to reduce the number of jobs, but also by analyzing the possibility of using different legal forms of cooperation, proper use of employees' potential and distribution of duties.
  • Optimization based on the use of financial tools - analysis of available forms of financing, debt restructuring, taking advantage of available tax exemptions and reliefs.

    The major benefits of improvement actions in terms of business operations are:

  • Comprehensive understanding of costs - the basis for making, comparing, benchmarking and finding out which costs, in which areas require adjustments, providing potential for optimisation;
  • The functioning of a company at the optimal possible cost parameters and with an effective decision-making process concerning expenses;
  • Optimization and potential cost reduction while maintaining a satisfactory level of product/service quality or, if necessary, ensuring an increase in quality;
  • Implementing solutions for all aspects, such as: employees, processes, decision points, time, data, resources, systems, materials, suppliers - this allows for taking into account all the possibilities for optimization and takes advantage of the economies of scale;
  • The introduced improvements cover all areas of the company's operations - lack of conflicts and decrease in motivation of employees and easier change management;
  • Being ready for the market changes by being able to transfer costs between different operations and departments, being able to use the skills of employees in a differentiated way and using resources and materials in a tailored way;
  • Increased security and reduced sensitivity of a company to unpredictable business situations, such as the recent COVID epidemic, by cost and business flexibility;
  • Building a competitive advantage resulting from tailored costs, developed flexibility, and thus allowing for long-term planning and implementation of a long-term company strategy.

How to start the cost optimization process?

Optimizing and making costs more flexible is a complex issue, requiring competence, commitment and systematic approach. However, the first actions will give measurable effects and increase motivation for further work.

There are different practical approaches to this issue. Two main streams focus on looking at costs and their categories and on making the analyses of business processes. Both approaches are good and depend on the size, structure and complexity of a company. When starting from cost categories, a list and appropriate categories should be created, such as personnel costs, production costs, material costs, operating costs, telecommunication costs, etc. - The list will be long, depending on how large the categories of costs are.  Based on this, it would be appropriate to start analyses for each of the categories - validity, utilisation level, reduction, replacement, change of supplier. We should also not forget that the particular costs are used for different functions and company's departments - so it is necessary to combine them properly and ensure the use of economies of scale, which will help to reduce the number of suppliers and strengthen the company's negotiating position.

The second approach is to start with business processes analysis - it is closer to me personally because it shows the costs from the point of view of a whole company, the relations between processes and operations as well as the related costs. This approach also makes it much easier to ensure the flexibility of our costs - we know where the costs are indispensable and where they are only useful, we know what priorities the individual processes have. Moreover, we should remember that the process itself, as a sequence of activities aimed at achieving a given goal, is inseparably connected with:

  • Contractors and persons responsible (human resources)
  • Execution time (also related to costs)
  • Systems
  • The resources needed to carry out the process.

In this case, we will also come to an analysis of the categories and costs incurred, but with a broader reference picture and, at the same time, the possibility to work on optimizing the manner and time of the business process implementation. Furthermore, if we look at the processes, we will be able to provide (build, change) controlling processes, which will ensure proper allocation and analysis of all costs related to day-to-day operations (great facilitation for further optimization).

At the same time, no matter which path we choose, these actions should be carried out systematically and regularly monitored - whether the introduced changes bring results, whether new opportunities for cost optimisation have emerged, new market situation does not change our approach or whether new market opportunities have opened up, such as new technologies, new suppliers, or the possibility of conducting a new purchasing procedure.

Process optimization step by step

Basing on the process approach I will present the next steps, which are worth keeping in mind when considering a holistic approach to the optimization of costs:

  1. Identification of corporate processes (production / service delivery, purchasing, sales, planning, logistics, warehouse, quality, accounting, controlling, human resources and payroll, HR, IT, administration and others depending on sector and business model). If possible, prioritizing them.
  2. Visualization and analysis of processes - action by action - based on observations / discussions with contractors. We can use professional tools which will allow for professional graphical mapping of the process. If we cannot do it - let's use an ordinary computer program or a piece of paper. It is important for us to identify the following data for each activity:
    • What's happening in the activity?
    • Who performs it?
    • What and from whom does it get?
    • What's the effect of the activity?
    • Is it a manual activity or an activity performed in a system (what system)?
    • Are any decisions made within the activity (by whom and on what basis)?
  3. Another important step is the cost analysis - made from two perspectives:
    • The progress of a particular process - one should focus on the time of its execution, elimination of non-core or overlapping activities and, consequently, costs related to the involvement of employees or machines. Leaving aside the areas in which we are able to use the already existing methods of measuring the working time of people and machines in the organization, in other cases we can do it ourselves - e.g. collecting information for process contractors, building assumptions on the basis of available data or finally some elements of the process simply measure with a stopwatch. Having such data will open the way to further optimization.
    • Resources which are used for processes and generate costs for a company. We are talking here about costs related to the delivery of a product/service (materials, logistics, distribution, energy, paper and others) as well as those related to the operation of the company (support processes, premises, energy, benefits for employees, office supplies, etc.). In this case, it is also worth using the data we have - hence the importance of the existence of controlling functions in a company - both on a general level and in assigning them to particular MPKs. If we lack certain data - we have to refer to our actions again - collect these data when analysing processes, making individual calculations or, if this is not possible, making assumptions for other - similar - processes.
  4. Analysis of possibilities and development of cost optimization. There are many ways to optimize costs and it will never be a closed list. There are also many methodologies, one of which is cost optimization. They depend on the sector in which the company operates, its profile and the type of cost itself. Nevertheless, the following actions will always work:
    • Benchmarking - comparing the cost data available, but also the methods of introducing changes with the data of companies operating in a similar sector, operating in a similar business model or having a similar number of employees, structure or area of operation. It will allow to define a point of reference and to get to know the direction which the company should take.
    • Process optimization understood as the visualization of the course of processes (often according to BPMN notation), including all elements of the process, analysis and development and implementation of improvements. It brings the best results if it is performed systematically and with the implementation of a process management system in the entire organization. Experience shows that improving support processes saves over 2,000 man-hours per month.
    • Automation and robotization of processes. Automation means ensuring the greatest possible use of systems and integration between them for the functioning of processes and minimizing the duplication of the same manual activities. Business Process Robotization (RPA - Robotic Process Automation) is a replacement of activities performed so far by employees by the application. Thanks to this, we speed up and increase work efficiency, achieve higher productivity (working 24 hours / 7 days a week / no breaks) and eliminate human errors. Implementation of one robot working 24 hours a day each day can save up to 7 jobs.
    • Lean standardisation, which allows you to observe processes and easily notice deviations. Its principle is also continuous improvement and search for improvements. Its activities include, among others, the workplace, description and standardization of activities performed and time management.
    • Kaizen's cost reduction system, which aims to reduce costs to an assumed level that are below standard costs. It is based on continuous implementation of improvements and analysis of deviations between current values and assumed cost levels.
    • The ABC (Activity-based costing) method, and consequently ABM (Activity-based management), based on cost calculation as the main source of information. The aim of the activities is to maximise the value for the client and to achieve profits thanks to this value. It focuses on taking actions to increase efficiency and effective use of resources. In the long term, it is about proper planning and increasing the company's profitability. This involves the process of budgeting (Activity-based budgeting), or adjusting the supply of resources to the demand generated by customers and the market.
    • Managing suppliers / contractors and implementing an effective procurement policy constitute the whole area of ensuring an optimal performance of procurement functions by the organisation. These are appropriate practices for the selection, systematic supplier assessment and research of market opportunities, the use of purchasing platforms and the use of economies of scale and proper budgeting and planning of central purchasing for the entire organisation.
    • Outsourcing, i.e. transfer of a part of processes outside the company preceded by the analyses. It concerns both support, logistics and distribution processes, sales, as well as main processes. Certain elements of these processes are effectively transferred to specialized organizations for implementation. The use of subcontractors / freelancers / employee leasing is also becoming more and more popular, i.e. ordering clearly defined activities and settlement of work results (and not the time consumed).
    • Adjusting the business model to the company's business profile and market conditions. This includes the current choice between different forms of work in different areas of the organization (remote / stationary work), decisions on the inclusion of certain functions in online activities or an appropriately selected sales strategy (stationary, field, online, mixed).
    • Proper selection of structure and competences of individual employees to their responsibilities and tasks. The complexity of the structure should reflect the characteristics of the company, and the managers of the company should have areas of responsibility that match their capabilities and competences. At the same time, the tasks assigned to employees should allow to increase the effects of their work. Let us remember that competences and capabilities are variable elements, so they should be systematically examined.
    • Basing the organization's activities on Management by Objectives (MBO), i.e. gaining assurance by the company's managers that the established strategic objectives are achieved by all levels of the organization and are reflected in the daily operations. The implementation of this solution must be accompanied by appropriate cascading of objectives. Moreover, in order to increase the effectiveness of the system, there should be created a bonus system reflecting the objectives and accounting for the results related to given expectations. It is important to carry out budget projections and ensure that the bonus system will be financially effective for the organisation, regardless of its implementation option.
    • Appropriate tax policy and effective use of financial instruments. Actions ensuring the selection of the most advantageous of legally available tax strategies and additional instruments proposed for particular types of companies and sectors, influencing cost optimization once the conditions are met.
  5. When introducing any optimizing changes, we must bear in mind that the stage of implementation and change management (preparation, planning, communication, monitoring) and the stage of monitoring and continuous improvement (long-term plan, assessment of directions and results, collection of feedback) are very important elements.

Optimization activities are a continuous, gradual and systematic process - only then will it produce the right results. The most important thing is to start this process and then systematically implement and monitor it. If an organisation is able to do this itself, it is in a very comfortable situation. However, looking at the vast array of possibilities and potential actions, it often happens that there are not enough resources, knowledge or data inside the organisation to carry out the right actions. Then companies shall benefit from the support of external companies, which can also be used as a motivation to take action, set directions and take further optimization steps. Regardless of the chosen approach, cost optimization is an investment that will bring long-term measurable cost benefits and increase the flexibility of the organization. If possible, cost optimization activities should also become a part of management by objectives and bonus schemes for employees of different levels.

Creating a cost structure which, on the one hand, will be optimal for the company's operations and, on the other hand, so flexible that the organization will be able to adapt it to the changing market conditions, will become an important part of its competitive advantage.

Contact our expert

Maciej Karzekotowski
Maciej Krzekotowski
Business Consulting Director
Crowe

Process management