Bryan’s Blog: Cost Cutting – Don’t throw out the baby with the bath water!

In the current economic climate many organisations are cutting costs, some dramatically. The role of Risk Management in the cost cutting process should be to ensure the right amount of cost cutting in the right areas to deliver short, medium and long term success. Below we outline the role of Risk Management when:

  • Systematically removing costs for modest savings of 5 and 10%.
  • Slashing costs to survive.


Systematic Cost Reduction

If your organisation needs to cut costs then the Risk Management process can help. It will assist you to identify the operational strategies, activities and tasks that can afford to be pared back without substantively increasing the risk profile of the organisation. Equally it helps identify the hidden costs or loss of opportunity of operating without certain functions or controls.

Revisit the organisation’s strategic risk profile to reassess which resources are needed most. In the review:

  • Readjust your risk appetite and delete/add risks as appropriate.
  • Rate or re-rate each of your strategic risks based on existing controls. Be sure to rank the effectiveness of these controls.
  • Stress-test each strategic risk by considering each risk minus some of the more resource intensive controls but beware the hidden costs and loss of opportunity. For example, “In the current market environment would our risk position be tolerable if we no longer sought ISO 9000 quality accreditation and diverted our focus to client relationship management?”. Here the hidden costs might be increased rework whereas emphasising quality might be an opportunity to gain market share as customers may not be able to afford any drop in quality in a tight market.
  • Estimate the savings for each control that can be pared back.
  • If the savings are sufficient, ask which of these controls will the best opportunities when the market recovers? These are the ones we pare back the least.


Cost Cutting to Survive

If your organisation is in survival mode, the risk management process should be used to help identify which elements of the business will be discontinued and which must be retained. The risk process helps deal with the great uncertainty under which we are making these dramatic decisions.

The corporate risk manager should be insisting that the executive revisit the organisation’s strategic risk profile. In the review:

  • Readjust your risk appetite.   Previously a risk event resulting in an unfunded 10% loss of revenue may have been survivable, it may now spell disaster. Certainly if an organisation is in survival mode, its risk appetite must have changed.
  • Review your list of strategic risks. Which ones are no longer relevant and can be removed? The remainder should be re-rated and hence re-prioritised.
  • Add the new risks that are threatening the organisation. Don’t state the obvious eg “Financial crisis continues until we run out of money!”. State what the problem really is. Examples include:
  1. “The fixed costs in business unit A are high and it will be more difficult to make profitable than business units B & C.”
  2. “The market for product A has collapsed and investing in sales and marketing will have negligible affect on sales.”
  • Develop risk treatments that address the route cause(s). For example:
  1. “Take action to return B & C to profitability immediately and depending on the long term prosects of A, either re-engineer the cost structure of the business or sell or shut down the unit.”
  2. “Redeploy the sales & marketing resources to areas where profitable revenue can be sourced. If the resources are not unique or highly valued, consider reducing these resources.
  • Estimate the savings and re-rate the risks. Is the risk profile likely to return to acceptable limits? If no, then another layer of analysis is needed.

If you would like to hear more about using the Risk Management Process to manage cost cutting programs, please contact us. Alternatively you might like to run an RMP Healthcheck to assess the maturity of your risk management framework.