Forecasting in times of uncertainty 

The focus on growth is on the agenda of most companies, but cost pressure is increasing, especially in periods of recession or general uncertainty such as the current one. How to reduce costs without impacting value activities? How to sustain growth with a view to efficiency? 

Unplanned or accelerated cost reduction efforts can often undermine an organization’s differentiation capabilities by becoming a new problem, rather than a solution. At the same time, it is often possible to release funds that are not applied productively elsewhere. 

The Closed-Loop cost management approach is a way to efficiently manage costs and quickly reinvest resources in generating competitive advantage and supporting growth. Why Closed-Loop? Because once the system is implemented, follow-up, monitoring and adjustment mechanisms are generated that allow “closing the loop” and ensuring a cycle of continuous efficiency. 

This approach seeks to achieve full visibility of operating expenditures across an organization’s business units at a granular level and explore how money can be spent more efficiently while adding value. 

The main components 

In our experience, there are three essential components to achieving the adoption of this model: 

Transparency. Create complete visibility of expenditures with a categorization oriented to purchasing management, instead of a financial categorization corresponding to the cost center where they are allocated. Hence, there is a greater probability of identifying cost reduction opportunities through better price negotiations, more optimized consumption policies and greater operational efficiency. 

Additionally, we recommend adopting the zero-based budgeting (ZBB) methodology through which budget owners start from scratch each year, allowing unnecessary costs to be removed and detailed forecasts to be created. Thus, savings can be directed towards higher value activities. 

Accountability. The approach defines responsibilities within the c-level for each cost category. This way, each manager negotiates with the business units the best ways to plan and consume expenditures and they agree on monitoring and adjustment mechanisms. This is how the control process becomes a cycle of continuous improvement. 

It generates a positive tension that stimulates teamwork around budget management. The general principle is that people treat the company’s money as their own, improving behaviors at all levels of the organization. 

Agility. Modifying the company’s habits to adopt an efficient cost management philosophy. Employees should continually question the necessity of an expenditure. These are not minor changes, and it will be vital to implement change management and communication programs to achieve this. The results will not be attained without the commitment of senior management and the understanding of all employees of the need for transformation and its impact at the individual level. 

Six steps to implement it 

The Closed-Loop approach is achieved by following a six-step methodology: 

  1. Visibility: analyzing in detail “who spends what and on what” based on budget information. 
  2. Value identification: defining spending policies and purchasing initiatives to reduce both price and consumption. 
  3. Category owners: creating accountability matrices to clearly assign cross-responsibility for each expenditure. 
  4. Zero-based budgeting: budgeting annually from scratch by exposing and eliminating unproductive expenditures. 
  5. Execution of purchases: executing strategic supply initiatives that allow materializing reductions with suppliers. Some of these decisions may be the outsourcing of the production of goods or services, or even the substitution of imports. 
  6. Control and monitoring: controlling monthly to identify variations in budgets, those responsible for deviations and action plans to resolve them. 

Implementing measures and making the right decisions on time at each level will determine the ability to adapt and the impact on the results of companies. At Tandem, we accompany in the implementation of each of these steps to ensure that decisions are made with a structured and robust methodology, without sacrificing speed or postponing emergencies.

Miguel Irazustabarrena
Director at Tandem.

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