5 questions that can drive cost transformation

In his present role as Royal Mail's director of cost transformation, Kamran Malik has encountered a few surprises. Among them has been the degree to which the team's work has needed to go beyond identifying cost savings to managing their implementation.

"When I first set up this team, I think what I had in mind was to identify new cost savings and then hand them over to the business for the business to execute ...," Malik explained. "[But] it's not about just churning out ideas, which I think I thought would be a bigger part of the job. It is still a big part of the job. But it doesn't extract the value, and what I'm finding is the extent to which I've had to reshape my team to actually focus on extraction and execution to make sure that the ideas ... do result in a bottom-line savings."

There are important lessons here for any management accountant looking at a cost transformation programme — introducing a new technology or process improvement, for example. If benefits identified in the business case are to be achieved, accountants also need to be engaged in the implementation stage.

Malik is in his sixth role at Royal Mail, the UK's largest letter and parcel delivery service. As a qualified accountant, he joined Royal Mail wanting to diversify away from finance-only roles and has spent time in several areas of the business. Along the way, he has picked up other professional qualifications in risk management and procurement.

Guided by Royal Mail's CFO, Stuart Simpson, Malik started to recruit to a new cost transformation team in September 2016.

The challenge: to extract savings in areas where the low-hanging fruit had already been taken and to explore other areas where savings could be harvested.

"The P&L ... is a good starting point," he said, but "that is where the money has actually been spent. So if you are trying to identify new areas, you have to actually understand the cost drivers. What happened to incur this cost? And only when you start going back down the chain in getting to the decisions and the metrics that are driving the cost do you start finding new opportunities."

As an example, Malik said "a blunt approach" could have been taken with the 48,000-vehicle fleet, cutting a percentage of its running costs from the P&L. Instead, the team looked at the problem in a different way. There are, he said, competing interests: prioritising quality of service, ie, fast delivery, against making sure the lorries are full. "So ... there must be a sweet spot in this space where you optimise the trade-off between quality of service and cost. ... And most importantly, you can actually pinpoint where the action needs to take place to actually then drive out savings."

With a team of 20, looking for clues where it could most effectively be deployed is one of Malik's challenges. In the recent months he has created a test — CREST, in which he summarises five questions that should be used to evaluate spending within the company:

1. Customer: "If the customer won't pay for it, then why are we doing it? Typically, there is only one real "'customer' and that is the external customer — the one who is paying actual money for a product or service and has a choice to go elsewhere."

2. Required: Malik's team then will ask, "Is it required? Is this a mandatory spend? So could it be health and safety or a legal obligation? Or is it helping to reduce risk? Because that's a perfectly valid use of funds, to manage risk."

3. Employee engagement: The team will examine engagement and the "circular feedback" of motivated employees helping customers and ultimately the business.

4. Supply chain: A further question is whether the spending improves the supply chain or contributes to more effective management of its contracts.

5. Transformation: Malik defined this as "spending money today which helps transform the business for benefits tomorrow".

"If you apply that CREST test, you can quite quickly start picking out areas where you can't immediately see the answer," he said. Those are the areas cost transformation teams can look further into to get a better understanding and start conversations that will yield more clues.

For example, recharging between departments is an area where transparency can help reduce costs. "[If] you don't get alignment ... between where the cost is generated and how it's charged, people can't manage the cost. So, for example, property might recharge utility bills into operations. So does operations understand what the drivers are?"

Data, benchmarking, and decision-making

A further way Royal Mail is driving down costs in the company is by making data more usable. Malik provided the example of vehicle idling times, which affect the company's fleet fuel costs. Originally, each office was getting idling times data for every office in a "data dump". By creating a new dashboard, each office could see only the data for its own top ten longest-idling vehicles, which allowed identification of the reasons for the inefficiencies and any relevant corrective action to be taken.

Looking at contracts is also a fruitful area for the team. Malik explained: "Quite often you can find a situation where contracts are written several years ago, and the world has moved on. ... And there can be opportunities in that space, both on the customer side and on the supply side."

Malik also focuses on benchmarking with relevant external companies. He explained that while first instincts are to look at competitors, "some useful insights" can be obtained by looking at different sectors.

The human element

Finding the clues doesn't always start with hard data, however. Time spent in the operational parts of the business, seeing how mail is being moved and where decisions are made, has proved useful, as has listening to the company's frontline customer experience teams' telephone calls. "For example, we found that some of our customer experience teams, to answer a query, had to open multiple screens — which was slowing down the number of complaints [they could handle] or conversations they could have," Malik said.

Behavioural change is at times an essential part of managing the 159,000 Royal Mail employees. At times of crisis a "command and control" environment is required to ensure things get done quickly, but Malik said that explaining why a change needs to be made gets buy-in from staff, especially if underpinned by company values. "If you can get the whys right and get that alignment, then actually people will work out the how and the what themselves."

For Malik, developing the team has gone hand in hand with his own development. "I think if you're going to do cost transformation properly, you have to own your own journey. ... If you understand your models and your framework, you can adapt. And that's the key to transformation ... to be able to respond to that specific business need. And I found that amazingly challenging and good fun."

Royal Mail: Facts and figures

Royal Mail, the UK’s largest letter and parcel service, delivers to 30 million addresses across the country six days a week.

Originally established in 1516, it was privatised in October 2013.

It currently forecasts a 4% to 6% annual decline in letter volumes for the medium term due to e-substitution and business uncertainty, but letters account for 60% of its UK revenue.

It employs about 159,000 people across the group, accounting for approximately one in every 185 UK jobs.

Royal Mail’s UK delivery network consists of six regional distribution centres, 38 mail processing centres, and about 1,400 delivery offices. Its fleet has approximately 48,000 vehicles.

The group’s European parcels business covers 41 European states through a network of wholly owned and partner companies.

Defining the high-performing team: The 5 C’s

The following summarises Kamran Malik’s five key ingredients for strong teamwork.

Capability: Hire people with specific skillsets for the job that you need to be done.

Capacity: Ensure that people are set up to succeed and have the capacity to do the job — a difficult challenge when you have finite resources.

Commitment: Understand people’s personal motivation in order to encourage them to give that discretionary effort you need.

Collaboration: Having achieved a high-performing team, the next question is, “How do you get people to work together?” Not just within the team but also in the wider business.

Consciousness: Be aware of changes within and outside your business, and be ready to adapt to those changes.

Oliver Rowe is external affairs content manager for FM magazine. To comment on this article or to suggest an idea for another article, contact him at Oliver.Rowe@aicpa-cima.com.