‘Cost leadership is essential for survival’
When I meet with senior finance executives, such as Dawn Earp, financial director of Implats (Impala Platinum) or Hanif Lalani, the former CFO of BT, they consistently tell me that cost leadership is a key role for finance.
CIMA was originally known as the Institute of Cost and Works Accountants and pioneered a new form of accounting to meet the changing needs of business after World War I. So, from the outset, the focus of management accountants has been on providing information to support the management of the business.
At its most basic level cost control is about ensuring that budgetary controls are applied and that costs are only incurred if they are within the budget. When necessary cost can be reduced crudely but effectively by reducing budgets, or even imposing an embargo on certain costs, such as recruitment or capital expenditure. The discretionary costs that are often the easiest to avoid are those that bring longer-term benefits; in other words, sometimes only false economies are affordable.
However, as Andrew Shilston, the finance director of Rolls-Royce, told the audience at the Management Accounting Research Group’s (MARG) annual conference recently, this form of cost reduction is like compressing a spring – they could bounce back to above their former level when conditions allow.
But cost control is not the only thing that is required. The finance function must provide cost management and cost leadership across the business. Cost management is a more sophisticated approach. Over the past two decades many leading companies have already halved the cost of their finance function relative to turnover
Cost management is increasingly about applying disciplines such as Enterprise Resource Planning (ERP), off-shoring and Six Sigma across the business. This approach recognises that costs must be considered relative to the revenue they generate. Sir Richard Lapthorne, chairman of Cable & Wireless, tells me that, much as he would like to, he cannot sit alongside every business manager.
For many leading organisations the solution is to deploy finance professionals to partner business managers as a means of improving the filtering of information for decision-makers and cascading the FD’s influence throughout the business.
A key part of this role is to provide insight into how costs can be saved and identify opportunities to innovate or create more value. Professor Zhang Xinmin of the University of International Business and Economics in Beijing told the audience at the MARG event that cost management is at its most effective when aligned with fundamental changes in how the firm is managed. These changes can include supply chain relationships or remuneration models, but there has to be a culture where cost management is understood as a business priority
Cost leadership is essential to long-term survival. This is because managers must view costs relative to the value they contribute to the business or its stakeholders in the short and long term. So cutting costs to improve operating efficiency must be balanced by investment in developing the company’s competitive position. The firm’s services or products must be continuously developed to meet customers’ needs so that the success of the business is sustainable
This balancing of short- and long-term objectives requires the engagement of management accountants, who have a keen understanding of the drivers of cost, risk and value across the organisation’s value chain. CIMA members have never been more relevant in ensuring sustainable success in a business world, where there is uncertainty around every corner.
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