Why a cost reduction programme can no longer be felt after twelve months

The relapse is the rule, not the exception

According to analysis by Bain & Company, 40 per cent of the executives surveyed admitted to missing their target of at least a ten per cent cost reduction. Among programmes with a target of twenty per cent or more, the figure was nearly 60 per cent. And even where a programme ended successfully on paper, the majority of respondents expected that, within three years, they would actually keep less than 75 per cent of the saving originally reported.

That figure is the real finding: the question is not so much whether a programme has an effect in its first year. Almost every programme does. The question is what happens afterwards.

What it comes down to

In the Bain study, respondents identified the biggest obstacle to lasting savings not as a lack of budget or the wrong priorities, but as behaviour in the line organisation – the daily practice in the departments that the programme was actually meant to change. A successful price negotiation in purchasing can be shown on a slide. Whether the requesting department then actually orders differently, specifies differently or approves differently only becomes visible months later – and usually not in the same presentation.

Three patterns recur here:

• Cost reduction targets were set against internal prior-year figures, not against what was actually achievable in the market. As soon as the starting point changes, the target loses its point of reference.
• The metric used to measure success covered only part of the value chain. One function shows its saving – while that saving is lost again, unnoticed, at the interface with the next department.
• Nobody was responsible for the interface itself. When two departments jointly own a process but neither owns it alone, every metric becomes diluted at exactly that point.

How this plays out over the year

The course of events is similar in many programmes. In the first weeks, things start to move: contracts are renegotiated, obvious spend is cut, a first success can be shown. After a few months, the harder cases come up – the ones where a saving demands a change in daily working practice, not just a signature. This is exactly where the effect slows down, while the reporting to the programme often carries on unchanged: the spreadsheet keeps showing the originally approved total, because nobody routinely reconciles it against the actual current state. As a result, the gap between the approved saving and the actual one does not grow suddenly but step by step – and stays unnoticed as long as monitoring is tied to the approved figure rather than the booked one.

What has proved its worth in practice

In the spirit of the Bain study, and from the experience of companies that have held on to their savings over several years, four recurring points of action can be derived:

First: targets are set against external benchmarks – what comparable companies actually achieve – not against the company’s own prior year. Second: the metric covers the whole chain, not just the function that originally launched the programme. Third: processes that touch several departments get a single owner – not two shared ones. Fourth: where internal services are currently passed on free of charge, internal recharging means that the receiving department sees the actual cost and questions it, rather than silently accepting it.

None of these four points is an additional cost-cutting measure that you would still have to approve. They are organisational decisions that ensure an already approved saving does not disappear again.

The question that comes before the next programme

If you are planning a new cost reduction programme, ask yourself not so much which line items can still be cut as what happened to your last programme after twelve months. Did the saving become part of your ongoing budget – or was it back up for discussion at year end because nobody defended it?

This review will cost you an afternoon. As a rule, it shows more quickly where your next programme needs to start than a new stocktake of all cost types would. And it stops the same question landing back on your desk in twelve months’ time.