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Four Questions You Should Always Ask Before Putting in Cost Reductions

Aug 12, 2008
If you learn to use these four questions, you'll usually make successful cost reductions. Ignore these questions, and your results won't be very good.

How can your proposed cost-reduction tests be improved to help you get more profitable customers?

This question has the probable added benefit of reducing your risk of losing profitable customers. Consider starting your thinking with additional cost-reductions that save customers time. Be sure to look at how additional cost-reduction elements could improve your ability to provide new benefits and more attractive pricing structures.

What changes can you make in your organizational business model that will make future cost-reduction tests faster, cheaper, easier, and more reliable?

Many companies find that their computer software is relatively inflexible so that many alternatives cannot be tested without expensive and time-consuming new programs being written. Can you create a testing information technology system that is flexible in its design to match the kinds of changes you need to make for most cost-reduction tests?

What changes can you make that will make it easier to see alternative cost-reducing business models?

Most organizations will find it very helpful to measure profitability by customer by offering using Activity Based Costing. In this way, switching your mix of customers and offerings as a focus can be evaluated for its potential. Many organizations can improve costs more by making changes in this dimension than in any other way. Think of this as making the environment fit your profile better, rather than the reverse.

Many firms will tell you that they have this information, but in reality it is built from accounting standards rather than looking at the way costs are incurred. As a result, you can have misleading information. Be sure you understand if the data can be used to estimate the effect on profitability of customer and offering mix shifts.

If you consider your track record with similar cost reductions, what do you learn?

Even though you will be running different tests and implementations, the patterns of problems will be relevant. For instance, if you had problems with computer systems not working as planned in past tests or cost-reduction programs, many of those issues will recur now unless you address them.

A frequent problem is the lack of a cost-reduction implementation team. One of the reasons some companies have a good track record for making profitable acquisitions is because the company's executives have developed a solid process for rapidly making needed business-model-based cost reductions beginning just as soon as the agreement to acquire occurs. An improved business model can be in place before the transaction is closed.
About the Author
Donald Mitchell is an author of seven books including Adventures of an Optimist, The 2,000 Percent Squared Solution, The 2,000 Percent Solution, The 2,000 Percent Solution Workbook, The Irresistible Growth Enterprise, and The Ultimate Competitive Advantage. Read about creating breakthroughs through and receive tips by e-mail through registering for free at

http://www.fastforward400.com .
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