Are You Looking for Cost Savings?

July 2006

Recently a CFO of a luxury cruise line hired me to teach a budgeting class. The cruise line was not meeting revenue targets and he felt he needed to slash costs to maintain profitability. He wanted to teach his team of budget analysts how to use zero-based budgeting and uncover waste in the organization.

First, he wanted to take on the marketing department because he had a feeling they were spending a little too freely.

My first reaction, which I didn’t share right away, was “EEK!” You don’t arbitrarily mess with sales and marketing when you are missing your revenue targets! Those departments are the ones that bring in the revenue!

He was approaching the problem backwards. You see, all budgets do is to translate the future plans of the company into financial terms. What runs a budget is the plan. Budgets aren’t meant to be a slash-and-burn cost-cutting tool. You can only uncover cost savings if you focus your organization on what is important if you plan. Once you have a plan, you know what expenses need to fall away. He wanted to approach it from the numbers first, without any planning.

So I designed a series of questions for his staff to use in approaching clients to uncover these cost savings. You will notice the slash-and-burn question doesn’t show up until question number 11.

1. What resources do you need to implement your plans this year?
2. What are your plans this year? For the next five years?
3. What is different this year over last year?
4. What, if you had all the resources possible, would you do?
5. What are the job responsibilities and major tasks of each of your staff?
6. What capital equipment do you need to do your job? Do you need to replace or upgrade?
7. What did you begin implementing in the last few years that has made a major difference in the way you operate?
8. What metrics do you use to determine your success?
9. What opportunities do you see for increasing revenues?
10. What would you define as a maximum level of service? A moderate level of service? A minimal level of service?
11. What ideas do you have for cost savings in the company as a whole? In your division?
12. What evidence—data, trends, models—do you have to back up your requests?
13. How can I help you put together your budget? What information do you need from me?

These questions first focus both the budget analyst and the marketing department on what is important. Then the budget analyst and the marketing department could analyze the gap between what is happening now and what they wish would be. This is where opportunities for cost savings or revenue enhancement are identified.

I went on to show them a wonderful alternative to the zero-based budgeting approach—performance-based budgeting.

His staff was relieved, if a bit overwhelmed. It is easier to slash and burn in the short run than it is to plan. Planning is a long-range, thoughtful endeavor. The results are not immediate. But you knew that.