Defining “Cost Consciousness”

My blog on “Raising Your Cost Consciousness”, posted earlier this month, has generated a fair bit of discussion, both here and on a number of LinkedIn groups.  In fairness, I did not provide a firm definition of this term, which was presented by Bjarte Bogsnes from Statoil at the Beyond Budgeting Annual Conference.

The various LinkedIn discussions have helped to clarify the distinction between “Cost Cutting” and “Cost Management” – which is certainly critical.  All of us would argue that a more rigorous approach to measuring and managing costs across multiple dimensions provides greater sustainable impact than across-the-board cuts, or short-term efforts to meet budgets.  Central to this is the use of better tools and techniques to measure and – more importantly in my opinion – communicate cost measures in a transparent and actionable way.

Returning now to Statoil, their reference to Cost Consciousness relates to this last point.  In fitting with their devolved management approach (“Ambition to Action”) which empowers decentralized management groups to make decisions that are aligned with corporate goals but focused on the needs of local business performance, Cost Consciousness describes a supporting approach.  At Statoil, managers understand their costs, and the drivers of cost, and make their best judgement decisions “in the field”.

Bjarte quotes CFO Torgrim Reitan:

We could easily put in place a cost program instructing all business areas to reduce costs by a given number. I believe this would work against our intention of building a cost- conscious culture. If we want to become more fit, a crash diet does not work. It takes a change of lifestyle. I believe Statoil is made up of competent, responsible and commercially oriented people who will make the right cost decisions. This means always working hard to reduce bad cost, while protecting good cost. You know better than me what these are and where they are.

Bjarte adds,

The question we want everybody to ask when making cost decisions is not “Do I have a budget for this?” but: Is this really necessary? What is good enough? How is this creating value? Is this within my execution framework? In addition, we must always consider capacity, both financial and human. As things look today, can we afford it, and do we have the people to do it? This information would typically come from our latest forecasts.

Here, he helps us understand that true cost management is not only historical, but also helps to develop better forward-looking tools to support decision-making that addresses performance goals in a rapidly changing environment.

Our task as professional cost leaders is to provide the transparency of cost information, communicated in a clear and actionable manner, so that local decision-makers can be as conscious of their cost levels and drivers when making complex decisions as Ray’s daughter is when selecting her lunch at school.

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One Response to Defining “Cost Consciousness”

  1. I appreciate Bjarte’s questions “Is this really necessary? What is good enough? How is this creating value? Is this within my execution framework?

    These are the same questions we pose in managing our personal finance. At a personal level we must answer them both from a short-term perspective and from a long-term perspective. Too much emphasis on short-term hurts the long-term and vice-versa. For example, short-term spending versus retirement savings. This is a tough balance but we personally take the consequences.

    A manager needs the same balance within their operations. Answers to Bjarte’s questions need to be consistent both at the cost center level and to the overall corporate level. I relate the cost center answers to our personal short-term level and the overall corporate level to our long-term perspective.

    The real art is for the entire company to function with this balance. Otherwise, perceived excesses in one area give license to excesses in other areas.

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