Seven Steps for Achieving Sustainable Cost Reductions

Slow economic and demand growth coupled with increased penetration of distributed energy resources (including energy efficiency) has resulted in declining energy industry sales and revenues. Many companies have witnessed their non-fuel O&M costs increase in the face of rapidly declining generation and sales, creating an unsustainable environment. To avoid increasing energy rates and further eroding sales, companies are looking to reduce costs to meet shareholder expectations. This document provides an overview of the steps that you can take to achieve sustainable cost reductions.

Introduction (Cont’d)

  • To achieve significant, sustainable savings a methodical approach is important:
    • Establish and communicate the cost-reduction imperative
    • Gain senior leadership alignment and support early in the process
    • Determine your cost-reduction approach
    • Document and communicate your cost-reduction roadmap
    • Establish a phased process that focuses on sustainable, transformational change
    • Conduct the cost-reduction exercise “top down” and “bottom up”
    • Ensure long-term sustainability by building savings in budgets and initiatives in business plans

Step 1: Establish and Communicate the Cost-Reduction Imperative

  • Establishing and communicating an easily understood imperative will help to ensure buy-in at all levels
  • One approach is simply illustrating the unsustainable environment of increasing costs relative to flat-to-declining revenues (see charts on previous page)
  • Another approach is using shareholder expectations to help to communicate the need for cutting costs, e.g., comparing Management aspirations for earnings per share (EPS) to industry and/or analyst expectations (see chart below)
  • The gap between the analysts/industry forecasts and management’s EPS goals can be converted to cost reduction and revenues requirements and highlight the need to further reduce costs

Step 2: Gain Senior Leadership Alignment and Support Early in the Process

Conducting a cost-reduction planning workshop with senior leadership will ensure alignment and support for the cost-reduction process.

Step 3: Determine Your Cost-Reduction Approach

Four cost-reduction approaches are predominate.

Step 4: Document and Communicate Your Cost-Reduction Roadmap

Step 5: Establish a Phased Process that Focuses on Sustainable, Transformational Change

Step 6: Conduct the Cost-Reduction Exercise “Top down” and “Bottom up”

Step 7: Ensure Long-Term Sustainability by Building Savings in Budgets and Initiatives in Business Plans

Key Success Factors

  • Obtain CEO support (a platitude, but essential), then gain support of his/her directs
  • Establish a project structure with employee teams, one that is internally led. Consider the role of outside help—the project cannot be centered around consultants “chopping” costs, but consultants can help guide the process and help the teams achieve success
  • Establish a great core project team with recognized internal leaders (e.g., Finance and HR, in partnership with consultants) to drive the process
  • Set reasonable targets informed by clear rationale (such as benchmarking)
  • Focus on sustainability in cost reductions, i.e., translate cost-reduction targets into potential labor reductions
  • Make sure cost-reduction initiatives are “actionable” and clearly connect the path from current to the future budgets
  • Track and monitor cost-reduction initiatives as they are being implemented to ensure they achieve cost savings
  • Utilize standard tools and templates to expedite the process and ensure deliverable consistency and quality

ScottMadden can help you plan and execute your cost-reduction initiative

  • Support for cost-reduction initiatives has been one of the core competencies of ScottMadden since its founding in 1983
  • We recently assisted a large electric utility client in saving more than $500 million in annual O&M costs
  • We have conducted myriad executive-level leadership team cost-reduction planning workshops
  • We have significant experience assisting companies to successfully design and implement integrated operating models
  • Our functional expertise in the energy industry is deep, and our consulting experience is broad—a combination we believe is unique in the consulting industry
View More

Contributing Authors

Ian Falk Director
Daniel Kohut Director

Welcome to ScottMadden!

Sussex Economic Advisors is now part of ScottMadden. We invite you to learn more about our expanded firm. Please use the Contact Us form to request additional information.