One of the most common questions executives ask is: “How do we get cost out now?”

It is a fair question, especially in periods of rate compression, inflation, or earnings pressure. But there is often a problem with the timing of the question. By the time many organizations ask it, their options may be limited.

Half the financial year could be gone. Priority projects may already be underway with committed investment and staff resources. Key suppliers are operating under carefully negotiated long-term contracts. Even if savings opportunities can be identified to deliver some in-year benefit, they still require time to evaluate, negotiate, and implement. They may also trigger commercial consequences or financial penalties that dilute the in-year impact.

The first uncomfortable truth is that the amount of spend that can realistically be influenced in the current financial period is often much smaller than executives expect.

Cost reduction is a change exercise

When organizations pursue a reactive cost reduction exercise, a familiar pattern emerges. Pro forma spreadsheets set the expectation, often using percentages to back into the required financial target. Executive teams challenge business line budgets and staffing plans. Business leaders must articulate how they will meet their pro rata share of the task. Procurement, technology, and operations are called on to review suppliers, specifications, and service levels to discover savings.

Debates, supported by a micro-industry of data analysis, emerge about what should be labelled as ‘discretionary’ or count as a ‘cost save.’ Organizational momentum stalls and business strategy takes a backseat as commercial assumptions and operating practices are stressed to meet the savings goal.

The second uncomfortable truth is that cost reduction is not just a financial exercise but also a change exercise.

Resistance is inevitable. People may agree with cost reduction in principle but predictably balk when it disrupts their carefully developed plans. Top-down, mathematically derived savings targets struggle to account for the challenge of implementation. This is why many cost reduction programs disappoint. Finding the number is one thing. Changing the business is another.

Cost management depends on cooperation. I have seen organizations chase savings in a way that creates a hornets’ nest of opposition. The procurement team becomes associated with cuts, restrictions, and disruption rather than business improvement.

Demand management is often the emergency brake

Under a tight timeframe, the practical levers to reduce in-year costs are usually limited. Implementing hiring freezes and moratoriums on new spending can provide a measure of short-term cost avoidance. Tightening spending controls on travel and entertainment, restricting categories of spend like consulting, and eliminating discretionary expenditures will also have some impact. These actions are relatively fast to implement but require enforcement and oversight to maintain.

Other actions require more effort. Consolidating suppliers, renegotiating pricing, and extending payment terms can deliver incremental benefits if executed at scale. Deferring or cancelling planned investments often deliver more material cost savings. These actions can work, but they are not equal, nor are they all sustainable. Some reduce waste, but most simply delay cost and, in many cases, destroy value.

The supplier is not always the problem. I have seen organizations spend enormous energy negotiating with suppliers to drive down cost, ignoring the fact that the underlying requirements should have been challenged earlier.

The third uncomfortable truth is that organizations leave themselves limited options due to underdeveloped cost management discipline.

Pressure is usually a symptom

In most cases, cost pressure is the consequence of earlier decisions. An external economic factor may trigger the need to reduce costs. The pressure is based on self-imposed constraints defined by the firm’s explicit decisions, such as targeted investments, and implicit decisions based on operating norms.

When cost challenges arise, organizations often focus on identifying actionable, near-term savings opportunities that can be implemented quickly. These will often be demand-management driven but unsustainable and have downside impacts. Organizations making cuts for short-term cash flow benefits may weaken competitiveness, reduce service quality, increase operational risk, defer innovation, or push cost into future periods. They can also create internal resistance that makes future improvement harder. While effective in the near-term, these rarely fix the underlying problems.

Organizations must consider what internal decisions got them to this point and begin building the disciplines to prevent a repeat occurrence. This is where organizations move from a recurring cycle of cost reduction to enterprise cost management. Cost reduction is reactionary, episodic, and disruptive. Cost management is deliberate, continuous, and sustainable.

A better executive question

If the question is how to get cost out now, there are actions available, but executives should recognize the constraints.

The addressable spend may be much smaller than modelled. It may take longer to action, and organizational resistance could create roadblocks. Importantly, the financial impact of unintended consequences may be higher than expected.

So perhaps a better question is: “What can we responsibly take out now, and how do we avoid finding ourselves in this position again next year?”

This changes the directive by mobilizing immediate action and confronting the underlying issues that created the situation. While pursuing reactive measures to achieve near-term savings, business leaders should trace back the chain of explicit and implicit decisions that led them to this moment. They will be able to identify discipline, governance, and control gaps, which, if addressed, reduce the likelihood of future issues.

Using the immediate cost reduction crisis as a burning platform, leaders can begin to build the cost management capability that will sustain them over the longer term.